Reasonable Salary Explained

S corporation shareholders who perform services for the corporation generally must receive reasonable compensation as wages before distributions. The IRS examines whether W-2 wages reflect the value of services provided—an area of facts and circumstances TaxChecker does not adjudicate.

TaxChecker's S Corp Tax Calculator and LLC vs S Corp Calculator use user-entered salary amounts to illustrate federal payroll and income tax effects. They do not recommend a salary level or opine on reasonableness.

Higher W-2 wages increase employee and employer FICA, which may reduce distribution amounts subject only to income tax in simplified models. Very low wages relative to profit may create audit risk in real filings—an important limitation for educational comparisons.

Payroll tax rates and wage bases follow IRS Publication 15 and related guidance for the labeled tax year. Self-employment tax on sole proprietor income provides a baseline comparison in the LLC vs S Corp Calculator.

W-2 versus contractor comparisons use similar payroll concepts on the employee side. See 1099 vs W-2 Explained for employment tax framing—not classification advice.

Reasonable compensation analysis requires professional judgment, industry data, and corporate governance. Use TaxChecker outputs as estimate-only planning inputs, not filing positions.