Are C Corp Dividends Subject to Net Investment Income Tax (NIIT)?

Your dividend income from a C corporation is subject to the net income investment tax, or NIIT. C corp stock produces dividend income to its shareholders, which is treated as property held for investment purposes. 

What Is the Net Investment Income Tax?

The net investment income tax is a 3.8% surtax paid in addition to regular income tax; however, not everyone who earns investment income is impacted. This tax can apply to interest, dividends, royalty income, non-qualified annuities, capital gains, and rental property income. NIIT can apply to individuals, estates, and trusts that have income above a certain threshold amount.

NIIT typically applies to high earners with significant investment income. You’ll only owe it if you have investment income and your modified adjusted gross income (MAGI) goes over a certain threshold. Your MAGI is adjusted gross income (AGI) with adjustments for certain foreign deductions or income. If you don’t have foreign income or deductions, your AGI and MAGI may be the same. 

Here are the threshold amounts:

• Married filing jointly — $250,000
• Married filing separately — $125,000
• Single or head of household — $200,000
• Qualifying widow or widower with a child — $250,000
  
  

Do I Need to Pay the Net Investment Income Tax on My C Corp Dividends?

Under current law, the tax rate on qualified dividends is 0%, 15%, or 20%, depending on your taxable income and filing status. If you qualify for the net investment income tax as a high-income shareholder, dividends can be hit with the 3.8% NIIT, raising the maximum federal rate to 23.8%. The level of a shareholder's participation in the C corp’s business is also irrelevant for purposes of the NIIT and applies regardless of whether the corporation's business is active or passive.

If you generate income from your C corp dividends and your MAGI exceeds the thresholds listed above, then the 3.8% will apply to your net investment income or the portion of your MAGI that goes over the threshold, whichever is less. 

For example, if you are a single filer who earned $275,000 and $20,000 of that was from C corp dividend income. You’ll owe 3.8% NIIT on the $20,000 C corp dividend income because it’s less than the overage. 

If you owe NIIT, you’ll need to calculate NIIT on Form 8960 when filing taxes.

Are There Any Exemptions?

In Chief Counsel Advice 202118009, the IRS addresses the question of whether tax dividends received by a shareholder who is also employed by the C corporation are subject to the net investment income tax.

C corporation stock is generally treated as property held for investment for purposes, “unless the dividends are derived in the ordinary course of a trade or business.” To qualify for the “ordinary course of trade or business” exemption, dividend income must be derived in a trade or business conducted:

1. Directly by the taxpayer (or through a disregarded entity owned by the taxpayer)
2. Through a pass-through entity

A C corp is not a pass-through entity, nor is it a disregarded entity. Therefore, dividend income received by a C corporation shareholder doesn’t pass the “ordinary course of trade or business” exception.