How does the dividend gross-up work? Aka why am I being taxed more than I was actually paid?

Once you have a corporation, your taxes get a bit more complicated – even for simple things like paying yourself. One of the quirks is that when you pay yourself dividends, you get taxed on your personal return for a higher amount. But you later get a credit, so that it all evens out.

Here’s an example

Let’s say you withdraw $100 of dividends from your corporation. Instead of showing up as $100 of income on your personal taxes, it shows up as $115 of income. This is known as the “dividend gross-up.”

Why the extra $15? It’s meant to reflect that if you’re withdrawing $100 of dividends from your corporation, you probably already paid $15 of corporate tax on that money.

So do you end up getting double-taxed on your personal taxes? No. That’s because even though you get taxed on $115 of income, later on in your tax return you get a credit of about $15 to offset it.

The end result is that you’ll pay the same combined corporate and personal taxes as a sole proprietor who earned the same amount. The system is designed to make that happen.