As an S Corporation owner, it’s crucial to understand how your compensation strategy affects your future Social Security benefits. While the “reasonable salary” approach can reduce payroll taxes, it’s important to ensure you’re still qualifying for maximum Social Security benefits.
Good news: The threshold for earning Social Security credits is relatively low. You need 40 credits to qualify, and you can earn up to 4 credits per year. In 2024, you earn one credit for every $1,730 in wages or self-employment income, up to a maximum of 4 credits per year.
The Social Security Administration calculates your benefit based on your 35 highest-earning years of W-2 wages, self-employment income (Schedule C), or partnership profits. S Corporation distributions and investment income don’t count towards this calculation.
While maximizing Social Security benefits is important, don’t forget about other retirement planning strategies. Utilizing instruments like 401(k)s and SEP plans can potentially provide greater long-term benefits than relying solely on Social Security.
Remember, the maximum Social Security benefit (about $4,555 per month in 2024) depends not just on your earnings, but also on when you start claiming benefits. Delaying benefits up to age 70 can significantly increase your monthly payment.
