Can You Apply for Social Security Benefits If You Were Self-Employed?
A self-employed person is as eligible for Social Security benefits as any salaried or hourly employee is.
The questions for self-employed persons are, however, whether income has been reported properly and whether taxes have been properly paid.
Upon retirement or disability, a self-employed person must have accumulated a minimum number of work credits to be eligible to apply for Social Security benefits.
First, what are “work credits,” and how are they awarded by the Social Security Administration (SSA)?
Social Security Work Credits
To determine eligibility for Social Security Disability, or SSD, benefits, the SSA logs the number of “work credits” you have earned over your working lifetime.
For each $1,470 earned, you are allotted 1 work credit, to a maximum of 4 per year.
Generally, you need 40 credits to be eligible for retirement benefits. The amount of working-time needed to reach the 40-credit minimum depends upon your date of birth. Generally, one will need more than 10 years of work to reach that number.
Being insured for Social Security Disability benefits is different than the requirements for Social Security Retirement benefits. In order to qualify for Social Security Disability benefits, one must have earned 20 work credits out of the ten years prior to the date becoming disabled. In other words, generally, the person must have worked five out of the ten years before becoming unable to work.
Earnings are translated into work credits by way of the income reported to the IRS by way of your annual tax return.
Thus, ensuring that income earned from self-employment is properly reported is essential.
Social Security Work Credits and the Self-Employed
First, however, it is essential that you not only report but pay your taxes as a self-employed worker.
Paying Social Security taxes as a self-employed person is more burdensome than for those working for third-party employers.
If employed, you and your employer each pay a 6.2% Social Security tax on earnings up to a maximum annual earnings amount.
As a self-employed person, given that no employer is pitching in, you pay the full 12.4% yourself, as well as Medicate taxes on your entire net earnings.
The “net earnings” calculated in determining your number of work credits are gross earnings with allowable business deductions and depreciation subtracted.
Note that certain forms of income, such as stock dividends and real estate rental income, are not included in Social Security “net earnings,” nor is income received from limited partnerships.
Net self-employment earnings, if $400 or more in a given year, are then reported to the IRS by filing a Form 1040, Schedule C, Schedule F, or Schedule SE. Which form is appropriate is best discussed with an experienced CPA. It will depend upon whether you receive self-employment income as an individual sole-proprietor or contractor or through an entity such as an LLC.
What if you owe back taxes or aren’t sure whether or not your self-employment income has been properly reported?
Work credits do not accrue until the taxes are paid.
Your annual SSA benefit statement is a good starting point in reviewing what has been paid and reported and what credits have been awarded as a result.
SSD Applications For The Self-Employed
When applying for Social Security Disability benefits, the SSA will examine your work history to determine whether or not you have performed “substantial gainful activity,” or “SGA.”
This is the determination of whether or not you are actually “working” and how much money you are earning as a result.
If your earnings from this “substantial gainful activity” exceed a specific ceiling, your disability benefits application will be denied.
In other words, you must be unable to perform “substantial gainful activity” in order to receive Social Security disability benefits.
Substantial Gainful Activity and the Self-Employed
So what is “substantial gainful activity,” and how does it apply to self-employed workers?
The amount of the earnings that can be received from SGA depends upon the nature of the disability involved.
For example, the amount that can be received monthly from SGA who are blind is $2,260 (as of this writing). For non-blind workers, the amount is $1,350.
What is SGA itself?
For self-employed persons, SGA is defined as work that involves significant physical or mental activities and is the kind of work usually done for pay or profit.
“Significant activities” are those that are useful in the operation of a business and have economic value—even if performed on a part-time basis. Even if the income earned is less than it may have been previously.
The activity is “gainful’ if it is the sort of work usually done for profit, even if it does not result in any profit.
Thus, income earned is not the determining factor utilized by the SSA when reviewing an application for disability benefits. In the view of the SSA, “income” is determined by a variety of external conditions, such as market fluctuation or commodities pricing or wavering supply and demand. The presence or absence of “income” does not necessarily speak to the activity in which an applicant engages, or in which an applicant fails to engage.
An application for Social Security disability benefits is a claim that you are unable to engage in such activity, not simply that you did not earn sufficient income from such activity.
Thus, the SSA employs 3 tests in the determination of SGA for self-employed applicants who are non-blind.
Substantial Gainful Activity Test 1: Significant Services and Substantial Income
Under this test, a person’s work activity is SGA if services are rendered that are significant to the operation of the business and if the individual receives a “substantial” income from the business.
If you provide services as an individual sole-proprietor, contractor, or single-member LLC, etc., your services will automatically be presumed “significant” under this test if “substantial” income is received.
If you work in a partnership or in another business form involving more than yourself, your activity will be “significant” if it amounted to more than half the total of the time required for the operation of the business.
The income considered under this test will be “substantial” if the monthly “countable” income from the business averages more than the annual countable income SGA Earnings Guidelines amount for that year.
What does that mean?
“Countable” income is what remains of business income after ordinary business expenses are deducted, as well as other deductions, such as the value of any unpaid help provided to the self-employed person by a spouse or children or others, or business expenses paid by a third party.
In 2021, the SGA Earnings Guideline maximum for monthly “countable” income was $1,310. Thus, any (average) amount earned above $1,310 would be considered “substantial” income for the purposes of this test.
Even if the income earned is not “substantial,” the SSA will still examine the question of whether or not the countable income earned since the onset of the applicant’s disability is less than was earned prior to become disabled.
Substantial Gainful Activity Tests 2 and 3: Comparability of Work and Worth of Work
If the SSA determines that the self-employed person is not engaging in SGA as a result of Test 1, above, the agency will then apply the 2nd and 3rd SGA tests.
Under these tests, a person is engaged in SGA if the work activity in question:
- Is comparable to that of unimpaired individuals in the same community engaged in the same or similar businesses in terms of relevant hours, skills, energy output, efficiency, duties, and responsibilities;
- Even if not comparable as described above, is still clearly worth more than the amount shown in the SGA Guidelines for the year in question when considered in terms of its value to the business, or when compared to the salary an owner would pay to an employee for such duties in that business setting.
Thus, the question of who or what constitutes a “comparable community” for purposes of these tests is highly important. A lack of evidence that the required factors between the applicant and those in the “comparable community” are well-matched will result in a finding that the work is not SGA.
Ensuring that the SSA reviews the right evidence drawn from the right “comparable community” pool is just one of the reasons potential SSD applicants should retain an experienced Florida Social Security Disability attorney to assist with such applications.
For blind self-employed individuals, the annual SGA earnings amount is higher than it is for non-blind applicants.
Generally, the self-employment earnings and activity of blind applicants is reviewed strictly in terms of the SGA Earnings Guidelines amounts and not in terms of the 3 Tests, above.
Self-Employment and Social Security Benefits: The Bottom Line
The bottom line with regard to self-employment and Social Security benefits is that the complexity of disability applications is greatly increased as a result of your independent working life.
Attorney Shea Fugate has successfully represented Florida disability claimants for over 20 years. A seminar speaker on Social Security Disability topics, Attorney Fugate has both the experience and knowledge to ensure that your claim is handled properly.