Gerelyn Terzo

Tue, July 7, 2026 at 6:02 AM EDT 5 min read

Quick Read

• S-corp owners who minimized W-2 salaries to dodge the 15.3% payroll tax built a smaller Social Security benefit base across all 35 counted years.

• Selling the business cannot repair the earnings record. Capital gains bypass FICA entirely and never raise the monthly benefit, even by a dollar.

• A large sale gain can make up to 85% of Social Security benefits taxable and trigger higher Medicare premiums through IRMAA two years later.

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A 66-year-old business owner running an S-corporation for decades is planning his exit. A buyer is circling, and he expects the sale to fund retirement. When it came time for him to request his Social Security statement, the projected monthly benefit was lower than expected. Friends with W-2 careers and similar lifestyles were getting noticeably bigger checks. He is now part of a wave of small-business owners reaching retirement age and discovering the same surprise.

On a small-business forum, an owner in a similar position asked why his estimated benefit looked modest after decades of running a profitable shop. The answer sits inside how Social Security counts earnings.

Why a Low Reported Salary Capped His Benefit

Social Security retirement benefits are calculated from a worker's top 35 years of FICA-covered earnings. Those earnings feed the Average Indexed Monthly Earnings, which then feeds the Primary Insurance Amount (PIA), the monthly benefit at full retirement age (FRA). Only wages that ran through payroll taxes count. Distributions from an S-corp do not.

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For decades, his accountant did what good accountants do: paid him a modest, defensible W-2 salary and routed the rest of profit out as distributions, which legally avoided the 15.3% combined Social Security and Medicare tax on that portion. Year after year, that strategy saved real money. It also meant the figure on his Social Security earnings record each year was the smaller salary, not the larger total he actually earned.