Suppose the owner pays herself $100,000 in salary and the business has, after this expense and all other expenses, $20,000 in the bank. The business then pays

Suppose the owner pays herself $100,000 in salary and the business has, after this expense and all other expenses, $20,000 in the bank. The business then pays tax on this $20,000. Any entity that makes a profit pays tax on it (roughly speaking). This is consistent and fair. If the business (as an entity separate from the owner) decides to pay a dividend then whoever gets the dividend pays a tax on the money. Suppose the business decides to give me a dividend of $20,000 and I have nothing to do with the business. Shouldn't I pay tax on it? There shouldn't be a distinction on who gets their dividends taxed. A dividend is a dividend. If the owner wanted $120,000 in salary then the owner should have paid herself $120,000. If she decides to give me a $20,000 dividend then I should pay tax on that dividend. If she decides to give herself a dividend then I she should pay a tax on that dividend. A dividend to herself is no more worthy of a tax break than a dividend to me. In the interest of consistency (fairness) the guiding principle is that an entity pay tax on money it gets after expenses. It also makes things easier.