Can a C-Corp pay it's sole owner a dividend instead of a salary?

Be aware that the dividends paid out by the C-Corp is NOT deductible on the corp return so the corp pays taxes on the dividends  AND the owner also  pays taxes on the same dividends on their personal return.  

@Critter-3 the taxpayer is contending he would pay no taxes on the dividends in the second year - they would probably be qualified dividends and thus taxed at 0% if his income is low enough.  

@augh no one can say whether the IRS would agree the first-year salary of $40K is reasonable. the IRS has huge databases that it can look at that would fairly represent your corporation and see the range of salaries taken and their net income. The issue I see, if you can pay yourself a dividend, then you should be able to pay yourself a salary. However, no one can say if the IRS would even give your returns a second glance. Put another way the code does not define reasonable compensation. Rather numerous court decisions have addressed the issue with no consistent results (different tax courts). Your interest would best be served by consulting a tax pro.  

I'll add a few additional comments:

• As in most things in life, there needs to be a balance in the wage vs dividend question.
• If this is your only source of income, and you are devoting your time to the business, the IRS will take the position that you should be paid a wage; I think that is a reasonable position as most people want to be paid for their time at a business.
• The IRS has many algorithms in their software and no wage yet paying out dividends could potentially trigger a red flag.
• Should the IRS reclassify some of the dividend as wage, you will then run into late filing of payroll tax penalties.
• You also need to keep in mind the long-term impact of not paying yourself a wage, yet working.  There is no mention of your age or goals of this business.  But not paying yourself a wage could impact your social security income at retirement.
• Finally, whatever your final determination is, and regardless of the year, I recommend you add some commentary to your corporate minutes discussing the methodology behind the decision.

Thanks.  The situation I plan to be in is like this:

I have a C-Corp that owns an LLC.  The LLC represents a project I am working on.  I will work on that project in year 1, and let's say it does well and generates a large amount of income (let's say $500,000).  The income flows to the C-Corp.  I pay myself a salary of $50,000 from the C-Corp, retaining the other $450,000 in the company as profits.  In year 2, I no longer work on the project, and it no longer generates any income.  Can I take another $50,000 in dividends from the C-Corp, or must I take it as a salary?  I would prefer the dividends, since if that's my only income, I would be at the 0% qualified dividend tax bracket.  If I took it as salary, I would have to pay payroll taxes and normal income tax on top of the 21% corporate tax I already paid on the income in the first year.  Since I did not work on the project in year 2, could I argue that I did not require a salary?

Now lets say in year 3 I begin working on a new project, and start a new LLC owned by the C-Corp.  If that project is not yet complete, must I be paid a salary out of those retained profits from year 1 now?

If this doesn't work, is there a better way to structure this?  Maybe each project is it's own C-Corp?

I'm just trying to find a way to average out my income over the years from large, inconsistent spikes of income, so that I don't hit the max tax bracket on my good year and then pay nothing in the other years.  I'd like to spread it out, paying a rate each year that more closely reflects the average earnings.

@augh 

What you are thinking of doing  may be considered some type of tax evasion plan ... I highly recommend you seek local professional guidance from someone who understands corporate law ... a tax attorney would be wise ... for the amounts you are talking about an attorney fee would be a good expense to make sure you don't get caught later  and owe thousands in penalties and interest. 

Some follow-up responses:

• As has been noted several times, this forum is not the place to have a tax planning discussion.  Just doesn't work.  You need to have a one-on-one with a tax professional.  Not only so you can plan, but so you understand the tax implications BEFORE you start going down the wrong path.  Don't be penny wise and pound foolish.  Those become tough lessons.
• What you are also missing, is that when the C corporation is 100% owner of an LLC, that LLC is a disregarded entity and is treated as if it were a division of the C corporation.  
• The IRS doesn't care what division generates the most profits.  It looks to the C corporation as one entity.

They way you explained it is not quite accurate. Corporations typically pay taxes on their earnings before distributing dividends to shareholders. The corporation's profits are taxed at the corporate tax rate 21%, and in some states the state corporate tax is deductible. After paying taxes, when the corporation distributes dividends to shareholders, those dividends are subject to personal income tax for the recipients not from the Corp as you stated. This creates what is known as "double taxation". Once at the corporate level and again at the individual level.

@jalva321 

You responded to a thread that is close to a year and a half old without any sort of attribution (i.e., no one knows who you are referring to when you wrote "you explained").

Please note the dates of the last posts in threads.

@jalva321  The dividends would likely be qualified and if that's his only income for the year the tax rate at the personal level would likely be zero.  his problem is whether or not $50K is reasonable comp. if not, and the iRS catches it, they would be more than happy to impose all sorts of penalties.