Structuring Your Early (or Semi-) Retirement as an S-Corp Owner

How to draw Social Security at 62 while deferring salary, trimming FICA, and preserving cash flexibility

1 | Why S-Corp owners face a unique retirement puzzle

Drawing Social Security before Full Retirement Age (FRA – 67 for anyone born in 1960 or later) triggers the Retirement Earnings Test (RET). In 2025, benefits are reduced by $1 for every $2 of wages or self-employment income above $23,400 ($1,950 / mo.) until the year you reach FRA; the higher “grace-year” cap is $62,160. (ssa.gov)

Because S-corp distributions are not “wages,” owners often lower salary to the RET threshold and take the rest as dividends. But that approach can invite “unreasonable-compensation” audits. A more robust answer is to formally defer salary rather than zero it out.

2 | The strategy in a nutshell

Age	Cash flow to you	What the IRS/SSA see	Why it works
62–66	Salary ≤ $23.4 k + S-corp dividends	Salary below RET cap; non-qualified deferred compensation (NQDC) is not yet vested and therefore not “wages.”	No RET benefit reduction; no FICA on deferred dollars yet.
67 (FRA)	Lump-sum (or installments) of deferred pay	NQDC vests; FICA applies once, up to the annual wage base ($176,100 in 2025) and Medicare thereafter. (ssa.gov)	RET no longer applies after FRA, so the payout doesn’t shrink benefits; OASDI portion is capped.

The linchpin is a deferred-comp plan with a “substantial risk of forfeiture” (e.g., benefits are lost if you voluntarily return to full-time work or the company’s EBITDA drops below a set target). Until that risk lapses, payments are special wages earned before you retired and therefore do not count in the RET. (ssa.gov)

3 | Step-by-step playbook

1. Adopt a written NQDC plan (IRC §409A compliant).

   • Spell out deferral elections, vesting date (FRA), and forfeiture triggers.

   • Board minutes should document that reasonable compensation is still being paid (watch the IRS “reasonable salary” doctrine).

2. Set 62+ cash salary at or below the RET threshold.

   • Example: Jane usually draws $120 k. Starting at age 62 she takes $20 k W-2 wages and defers $100 k/year.

3. Report deferrals correctly.

   • Box 11 on the W-2 shows “Nonqualified Plans” deferrals; boxes 3 & 5 show only the $20 k actually paid.

4. Collect Social Security at 62.

   • Jane receives $2,400/month; benefits are not offset because W-2 wages stay under $23.4 k.

5. At 67, vest and pay out.

   • Five deferrals + 5% compound growth = ≈ $558 k.

   • First $176,100 is subject to 6.2% OASDI ($10,918 each from company & employee) and the full amount to 1.45% Medicare (plus 0.9% additional Medicare if AGI > $200 k). After that, only Medicare applies.

   • No RET reduction and no second round of Social Security tax on the same dollars in later years.

4 | Handling emergencies without busting the plan

If cash is needed before 67, consider a bona fide shareholder loan instead of cracking the NQDC:

• Promissory note at or above the Applicable Federal Rate (AFR).

• Fixed repayment schedule and collateral, if prudent.

• Book the loan receivable on the company’s balance sheet—avoids constructive‐dividend treatment and keeps the deferred-comp plan intact.

5 | Tax & compliance guard-rails

Issue	What to watch
FICA timing (IRC §3121(v)(2))	Tax hits when risk of forfeiture ends. Design vesting at FRA to push FICA into the same year the payout occurs.
Reasonable salary	Keep some W-2 wages flowing; benchmarking tools (e.g., RCReports) help establish a defensible figure.
409A penalties	Late or changing deferral elections trigger 20% surtax + interest. Lock in elections before the service year begins.
Plan insolvency risk	NQDC remains a general corporate obligation—use a rabbi trust or corporate-owned life insurance (COLI) to informally fund obligations while preserving creditors’ access (a 409A requirement).
State payroll taxes	Some states mirror federal rules; others (e.g., CA, NJ) impose state disability insurance even after FRA. Verify locally.

6 | Illustrative savings snapshot

Without planning: Jane earns $120 k wages at 62 → exceeds RET limit by $96.6 k ⇒ Benefit reduction ≈ $48.3 k in 2025 alone.With NQDC plan: Reduction = $0 for 62–66; FICA on deferred dollars delayed and capped.

Five years of untouched benefits (≈ $144 k) plus investment growth on deferred salary can easily outstrip the single FICA hit at 67.

7 | Key take-aways for S-corp owners

• Front-load the benefit: Claim Social Security at 62 without the usual haircut.

• Defer, don’t discard, wages: Keep IRS “reasonable comp” satisfied while sidestepping the RET.

• One-time payroll tax price tag: Pay FICA once, at FRA, when it no longer affects benefits—and only up to the annual wage base.

• Liquidity safety-valve: Use shareholder loans for emergencies instead of breaking the deferral.

• Plan early & document well: 409A, 3121, corporate minutes, and W-2 coding must all align.

Disclaimer – This blog is educational only and does not constitute tax, legal, or investment advice. Consult your CPA, ERISA attorney, and financial planner before implementing an NQDC strategy.

By pairing a well-drafted deferred-comp plan with disciplined wage management, S-corp owners can enjoy Social Security income starting at 62, postpone payroll taxes, and still unlock a sizeable, lump-sum paycheck at full retirement age—an elegant bridge from “semi-retired” to fully retired living.