How to handle an S Corp when salary exceeds OASDI max limits - still worth it?

The S Corp can still provide tax benefits even with a salary above the OASDI wage base limit ($168,600 for 2025). Here's why: While you won't save on Social Security tax for salary above that threshold (since you'd hit the limit either way), you can still save on the Medicare portion (2.9%) for any business profits taken as distributions rather than salary. Plus, distributions avoid the additional 0.9% Medicare surtax on high earners that applies to wages over $200,000. Let's look at your numbers - if your business makes $325k and you take $185k as salary, that leaves $140k potentially available as distributions (minus business expenses and retirement contributions). You'd save the Medicare tax on those distributions, which is about $4,060 in tax savings (2.9% of $140k). The catch is that your salary must be "reasonable" for your role and industry, which you've already accounted for. The IRS scrutinizes S Corps that take too little salary to avoid employment taxes.

I went through exactly this process last year when my consulting income started taking off. I was super confused about whether an S Corp made sense when my reasonable salary would be over the Social Security wage base. After days of research and getting different answers from different accountants, I found this amazing tool at https://taxr.ai that analyzed my specific situation. It ran the numbers for my case and showed that I'd still save about $4,800 in Medicare taxes with the S Corp structure, even with my salary above the OASDI limit. The analysis showed exactly where the savings came from and what ratio of salary-to-distribution would be reasonable in my industry. It also flagged some retirement planning opportunities that I hadn't considered.

Just wanted to follow up - I tried out that taxr.ai tool that was mentioned and it was actually really helpful for my situation! I was in almost the exact same position (business income around $300k, reasonable salary needed to be about $175k). The analysis showed I'd save approximately $3,600 annually even after accounting for the additional costs of running an S Corp. It also flagged that in my state (California), there's an $800 minimum franchise tax for S Corps that eats into the savings. The tool provided an actual percentage range for what would constitute a "reasonable" salary in my field based on industry data, which was super helpful. I ended up moving forward with the S Corp and working with my accountant to set up the proper payroll and tax planning. Already seeing the tax benefits this quarter. Definitely worth checking out if you're on the fence about this decision!

I tried for THREE WEEKS to get someone at the IRS to answer questions about S Corp reasonable compensation rules when you're over the OASDI limit. Literally could not get through or would get disconnected after waiting for hours. So frustrating when you're trying to follow the rules but can't get basic guidance. I finally used https://claimyr.com and got connected to an IRS agent within about 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c. The agent was able to confirm that yes, the S Corp structure still provides Medicare tax savings even when your salary exceeds the Social Security wage base, and they pointed me to some specific guidance documents. They also warned me about common audit triggers for S Corps, including suddenly dropping your salary after the first year or two. Apparently that's a red flag they look for.

I have to admit I was wrong about Claimyr. After bashing it in my last comment (sorry about that), I was still stuck with some S Corp questions that my accountant couldn't answer clearly. Against my better judgment, I tried the service. Got through to the IRS in about 30 minutes when I had previously spent 3+ hours on multiple days trying. The agent was surprisingly knowledgeable and explained exactly how the Medicare tax savings work with S Corps even when your salary is above the Social Security cap. They also explained the documentation I should keep to justify my salary-to-distribution ratio if I ever get audited. For anyone in a similar position - yes, the S Corp can still save you money on the Medicare portion even with a high salary, but you need to document why your salary is reasonable and keep good records. And apparently yes, there are ways to actually reach the IRS when you need them!

Something nobody has mentioned yet - don't forget about state taxes! Depending on your state, the S Corp might have franchise taxes, extra filing requirements, or other costs that could offset your Medicare tax savings. For example, California charges an $800 minimum franchise tax for S Corps regardless of profit, plus an additional tax on net income over $1M. New York has a filing fee based on your NY-sourced income. Make sure to factor these into your calculations.

Has anyone considered the QBI deduction (Section 199A) impact when deciding between S Corp vs. sole proprietor? I've heard that having too high of a salary in an S Corp can reduce your QBI deduction.

Great discussion everyone! As someone who made the S Corp election two years ago in a similar situation, I wanted to share some real-world experience. My consulting business was pulling in about $280k, and I set my reasonable salary at $160k (just under the OASDI limit at the time). Even with that salary level, I still saved roughly $3,500 annually on Medicare taxes from the distributions. One thing I learned the hard way - make sure you factor in the quarterly estimated tax payments on your distributions. Unlike salary where taxes are withheld automatically, you're responsible for making those payments yourself. I got hit with underpayment penalties my first year because I didn't adjust my estimates properly. Also, the administrative burden is real. Beyond the extra tax filings, you need to run actual payroll (even if it's just for yourself), maintain corporate minutes, and keep business and personal finances completely separate. It's definitely more work than being a sole proprietor, but the tax savings and liability protection have been worth it for my situation. The key is running the numbers for YOUR specific circumstances - income level, state taxes, industry standards for reasonable compensation, and your tolerance for additional paperwork and compliance requirements.