Stop Overpaying Payroll Taxes After 65

Key Takeaways

• Federal law requires you to pay the 12.4% Social Security tax and 2.9% Medicare tax on earned income regardless of your age or benefit status.
• If you operate as a sole prop or single-member LLC, you pay the full 15.3% self-employment tax on all net profits up to the annual wage base.
• Switching to an S-Corp election can save thousands by allowing you to take a portion of your income as a distribution not subject to payroll taxes.
• High earners over 65 still owe the 0.9% Additional Medicare Tax if their income exceeds specific thresholds set by the IRS.

1. Review your last Schedule SE to see exactly how much you paid in self-employment tax last year.
2. Consult a CPA about whether an S-Corp election (Form 2553) makes sense for your current profit levels.
3. Check your Social Security statement at ssa.gov to see if these extra payments are actually increasing your future monthly benefit.

The Walmart Trap for Small Business Owners

A recent MarketWatch story highlighted a 76-year-old Walmart employee who was shocked to find FICA taxes still disappearing from his paycheck despite already being on Social Security. This isn't just a retail worker problem. If you run an LLC or a consulting business in your 60s or 70s, the IRS expects their 15.3% cut of your hard work. There's no 'senior discount' for payroll taxes. You pay in as long as you have 'earned income.

For a solo business owner, this is often the most painful check to write. While an employee at Walmart only sees 7.65% leave their check because the employer covers the other half, you're the employer and the employee. You pay both halves. This is known as the Self-Employment Contributions Act (SECA) tax. According to the IRS, this tax applies to any individual with net earnings from self-employment of $400 or more. Even if you're already collecting a check from the Social Security Administration, you must keep funding the system for everyone else.

Why Your LLC Structure is Costing You

Most owners start as a simple LLC. It's easy, but it treats every dollar of profit as earned income. If your consulting business clears $100,000 in profit, you owe 15.3% on that entire amount (subject to certain adjustments). If you're 68 and already have your retirement plan settled, this feels like throwing money into a void. You might be at the maximum benefit level already, meaning these extra payments won't move the needle on your monthly Social Security check.

Changing how the IRS sees your business is the primary way to stop this leak. By electing S-Corp status, you split your income into two buckets: a reasonable salary and a distribution of profits. You only pay payroll taxes on the salary. The distribution bucket is exempt from the 15.3% hit. Say you take a $50,000 salary and a $50,000 distribution. You just cut your payroll tax bill in half. It's one of the few legal ways to lower this specific tax burden without actually earning less money.

The Earnings Test Risk

If you're between 62 and your full retirement age (FRA), you have an extra hurdle. The Social Security Administration limits how much you can earn before they start withholding your benefits. For 2024, that limit is $22,320. If you earn more, they withhold $1 for every $2 you earn over the limit. Once you reach FRA, this limit disappears, but the payroll tax requirement stays forever. You can read the specific thresholds on the SSA.gov website.

Income Type	Payroll Tax (15.3%)	Income Tax
W-2 Salary	Yes	Yes
LLC Net Profit	Yes	Yes
S-Corp Distribution	No	Yes

Hypothetically, a 67-year-old graphic designer in Oregon clearing $80,000 a year as a sole proprietor is paying roughly $11,300 in self-employment taxes. By moving to an S-Corp and setting a reasonable salary of $45,000, they could potentially keep an extra $5,000 a year in their own pocket instead of sending it to D.C. This isn't about dodging taxes; it's about choosing the right tax structure for your stage of life.

Deciding to change your tax status takes about two hours of work with a professional and can be done by filing Form 2553 with the IRS.

Related free tool

LLC vs. S-Corp Savings Calculator — See if an S-corp election would pay off for you. Free, no signup to start.

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📋 Disclaimer

This article is for informational purposes only and does not constitute legal, tax, financial, or professional advice. Laws and regulations change frequently, and the information presented may not reflect the most current legal developments. Always consult with a qualified professional (CPA, attorney, financial advisor) before making business decisions based on this content. MyBizNerd may receive compensation through affiliate links, but this never influences our recommendations.

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