Self-Employment, Excess Income, and Your Social Security Benefits

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If you’re about to claim Social Security retirement benefits or you’re in the first year of retirement after claiming your benefits, you may have concerns about Social Security tests for self-employment and/or excess income. Considerations about self-employment, excess income, and your Social Security benefits in the initial year of retirement can be confusing.

In general, if you were self-employed before requesting your Social Security retirement benefit, Social Security rules say that if you render “substantial services” in the first year of retirement, you must consider the income for benefits eligibility. Understanding what’s meant by substantial services in your situation can help you make better financial planning choices.

“Substantial Services” Rendered by Self-Employed People

During your first, or initial, year of retirement, you’re usually considered to be retired as of the month your Social Security benefits begin. If you’re still earning income, you should consider:

  • Time you devote to business, including the hours you spend at a place of business, at a client’s location, at your home, etc.
  • Nature of services you perform
  • How the services you perform today relate to those you performed prior to retirement
  • Other considerations, including the capital you invested in a business, the business type, the existence of a manager you pay to continue business activities, family members involved in business management, or partner(s) in the business

If you spend less than 45 hours per month engaged in rendering these services, Social Security might not consider your time involvement as “substantial.” However, even fifteen hours a month can be considered substantial if you’re still involved in managing a “sizeable” business or you’re experienced in a “highly skilled” business or occupation. If you devote less than 15 hours per month to the business, Social Security probably won’t consider your engagement as “substantial.” Importantly, what you earn doesn’t control the qualification of substantial services according to Social Security.

Your Income and Substantial Services

If you earn a great deal of money from performing services during the first year of retirement, the time you spend earning the money and not how much money you earned is more important. If you earn a high amount of income it doesn’t automatically mean you rendered substantial services. A low amount of income or even no income from rendering services doesn’t negate the concept of substantial services.

The income test for substantial services is relevant in the first year of retirement year. Afterwards, the amount of money you earn is used to determine if your benefits are partially or completely lost.

Let’s look at Social Security rules concerning dual self-employment and employment earnings or income received after you request retirement benefits from SSA.

Dual Self-Employment and Employment Income Considerations

The primary difference between Social Security’s max earning base and employee wages you receive is the tax treatment of self-employment earnings.

For instance, you’re an attorney and, in addition to a practice, you work a few hours each month at a law school. You teach a class and you earn USD 30,000 as an instructor. You’re considered a part-time employee of the law school.

  • If you earned USD 100,000 from self-employment (viewed as USD 92,350 by SSA, or 92.35 percent of the income), only USD 88,500 of your net self-employment earnings are subject to OASDI tax (USD 118,500 minus USD 30,000). Your self-employment earnings are of course subject to tax.
  • In general, if you earned at least USD 434 over the tax year from self-employment in the first year of retirement, OASDI self-employment taxes must be paid.
  • In a second example, let’s say your part-time employment income is higher. You earn USD 118,300 a year as a professor. Your net earnings from practice are higher than USD 400, so there’s no question about the need to report them. In this example, though, just USD 200 is subject to self-employment tax (USD 118,500 less USD 118,300).

Taxes you owe in these examples are for illustrative purposes only. Ask your financial adviser about OASDI taxes that may be owed on your income. Next, let’s review what Social Security means by “wages.”

Social Security Wages

In addition to understanding self-employment, excess income, and your Social Security benefits, it’s important to understand what Social Security means by the term “wages.”

Generally speaking, wages refers to pay you received as an employee for employment that’s covered by the Social Security Act. You receive work credit on your Social Security statement. Work credits used to calculate current or future Social Security benefits.

You must pay federal taxes on wages earned from an employer but you may request an income tax refund in any year you paid over the required base level. Your employer is required to pay taxes on wages—up to the base level—for all employees working for the business or organization. In addition to paying into Social Security program taxes, your income and tax withholding are subject to Original Medicare Part A (hospital insurance).