Rules for Retiring From Your Own Business & Drawing Social Security

Typically, Social Security and Medicare tax payments are made for you through your payroll deductions when you work for someone else. However, if you work for yourself or with a small business partner, you are responsible for paying these taxes.

Currently, self-employment taxes totaled ​12.4 percent​ of net income up to a maximum annual payment of ​$142,800​. In addition, you would need to pay ​2.9 percent​ Medicare tax on all your net earnings. And should you earn an individual income of ​$200,000​ or more, your Medicare taxes will be ​0.9 percent​ higher.

You can collect Social Security benefits when retiring from a business you own. However, it becomes a little more confusing for self-employed people to determine when they are retired in the eyes of the Social Security Administration.

Deciding on retiring from a business you own is a personal decision, and there is not necessarily a right or wrong answer. Generally, however, the later you retire, the greater your retirement benefits will be when you start collecting them.

Under current Social Security rules, the full retirement age for most people is between ​66 and 67 years​ of age for those born between 1943 and 1959. However, the number of years and months depends on their birth dates. For those born in 1960 or later, the full retirement age is ​67​. But you can retire anywhere between ​62 and 70 years​ of age.

However, withdrawing from your own business can be a little more complicated than retiring from an employer, so you need to understand the relevant rules.

Working during retirement can affect your Social Security benefits if you have not reached the full retirement age.

In 2021, you can earn up to ​$18,960 ​per year without reducing your Social Security benefits before you reach full retirement age. Then Social Security will deduct ​$1​ from your benefits for every ​$2​ you earn above the set limit.

The year you reach full retirement age, your benefits are reduced by less. And after full retirement age, you can earn as much supplemental income as you like without reducing your Social Security benefits.

If you are an employee and stop working, it's pretty easy to determine when you're retired; you simply stop earning a paycheck. But if you're self-employed, determining when you're retired can be a little more complicated.

Suppose you are self-employed and enter into retirement to begin collecting Social Security benefits. In that case, there may be additional questions you are required to answer to determine if you are eligible to receive your full benefit.

Some of these questions include: whether other members of your family have assumed some or all of your duties associated with a family business; whether you continue to earn income from your it, even at a reduced rate; whether you have control over your income; whether you still own stock in the business; and whether your company provides income for your immediate family members.

Depending on your answers to these questions, Social Security may determine that you are still technically working during retirement. If your income surpasses the maximum, your benefits may be reduced until you reach full retirement age. Social Security may also require you to provide additional documentation substantiating your answers to its questions.

Even if Social Security decides that you are still employed while you're receiving benefits, it must determine whether your income necessitates a reduction in your Social Security benefit.

If you are self-employed you must count all the earnings you made in connection with your business, as income for Social Security when it is actually received. If your income falls below a certain threshold, then your benefits will not be reduced.

Money earned from investments, other government benefits, and some other sources is generally excluded. Check with current Social Security rules to determine what does and doesn't count as income.

If you have your own business and decide to retire, similar to how an employee would view retirement, you should be able to collect Social Security just like everyone else. However, if you try to manipulate business earnings to qualify for early Social Security benefits, you may have a problem.

Suppose Social Security determines that you have been under reporting your earnings in any way or have misrepresented yourself in its questionnaires. In that case, it reserves the right to adjust your benefit immediately. Social Security may also notify the IRS of any under reported income so that it can determine whether you owe any additional tax liability. So, be careful when accounting for your money when retiring from a business you own so you can enjoy Social Security retirement benefits.