A Business Owner Paid Himself a Low Salary for Decades to Save on Taxes. The Trade-Off Shows Up Now, in a Smaller Social Security Check, and Selling the Company Won’t Fix It.

Gerelyn Terzo

Tue, July 7, 2026 astatine 5:02 AM CDT 5 min read

Quick Read

• S-corp owners who minimized W-2 salaries to dodge the 15.3% payroll taxation built a smaller Social Security payment basal crossed each 35 counted years.

• Selling the concern cannot repair the net record. Capital gains bypass FICA wholly and ne'er rise the monthly benefit, adjacent by a dollar.

• A ample merchantability summation tin marque up to 85% of Social Security benefits taxable and trigger higher Medicare premiums done IRMAA 2 years later.

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A 66-year-old concern proprietor moving an S-corporation for decades is readying his exit. A purchaser is circling, and helium expects the merchantability to money retirement. When it came clip for him to petition his Social Security statement, the projected monthly payment was little than expected. Friends with W-2 careers and akin lifestyles were getting noticeably bigger checks. He is present portion of a question of small-business owners reaching status property and discovering the aforesaid surprise.

On a small-business forum, an proprietor successful a akin presumption asked wherefore his estimated payment looked humble aft decades of moving a profitable shop. The reply sits wrong however Social Security counts earnings.

Why a Low Reported Salary Capped His Benefit

Social Security status benefits are calculated from a worker's apical 35 years of FICA-covered earnings. Those net provender the Average Indexed Monthly Earnings, which past feeds the Primary Insurance Amount (PIA), the monthly payment astatine afloat status property (FRA). Only wages that ran done payroll taxes count. Distributions from an S-corp bash not.

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For decades, his accountant did what bully accountants do: paid him a modest, defensible W-2 wage and routed the remainder of nett retired arsenic distributions, which legally avoided the 15.3% combined Social Security and Medicare taxation connected that portion. Year aft year, that strategy saved existent money. It besides meant the fig connected his Social Security net grounds each twelvemonth was the smaller salary, not the larger full helium really earned.