Typically, when you work for someone else your Social Security and Medicare tax payments are made for you through your payroll deductions. However, if you work for yourself or with a partner in a small business, then you are responsible for paying these taxes. In 2011, self-employment taxes totaled 13.3 percent of net income up to a maximum annual payment of $106,800. That was due to a tax reduction that was labeled temporary, however -- in most years, the tax level has stood at 15.3 percent. While self-employed individuals can collect Social Security benefits when they retire just like anyone else, it becomes a little more confusing for self-employed people to determine when they are retired in the eyes of the Social Security Administration.
Decide When You Want to Retire
Deciding when you want to retire 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 do start collecting them. Under current Social Security rules, the full retirement age for most people is between 66 and 67 years of age, depending on their birth dates, although, you can retire anywhere between 62 and 70 years of age. Retiring from your own business can be a little more complicated than retiring from an employer, so you need to understand the relevant rules.
How Working During Retirement Affects Your Benefits
The rules change every year, but for 2011 you can earn up to $14,160 per year without reducing your Social Security benefits before you reach full retirement age. 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.
Special Rules if Your Self-Employed
If you're self-employed and enter into retirement to begin collecting Social Security benefits, 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 business, even at a reduced rate; whether you have control over your income; whether you still own stock in the business; and whether your business 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 and, 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.
What Counts As Income?
Even if Social Security decides that you are still employed while you're receiving benefits, it must then 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, when it is actually received, as income for Social Security. 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, then you should be able to collect Social Security just like everyone else. However, if you try to manipulate your earnings from your business in order to qualify for early Social Security benefits, then you may have a problem. If Social Security determines that you have been underreporting your earnings in any way or have misrepresented yourself in its questionnaires, then it reserves the right to adjust your benefit immediately. Social Security may also notify the IRS of any underreported income so that it can determine whether you owe any additional tax liability.
- Social Security Administration: How Work Affects Your Benefits
- Social Security Administration: When You Retire From Your Own Business: What You Need to Know
- Social Security Administration. "Workers with Maximum-Taxable Earnings." Accessed Oct. 31, 2020.
- Social Security Administration. "Social Security Credits." Accessed Oct. 22, 2019.
- Social Security Administration. "Fact Sheet: 2021 Social Security Changes." Accessed Oct. 31, 2020.
- Social Security Administration. "Benefits Planner: Retirement." Accessed Oct. 15, 2020.
- Social Security Administration. "Delayed Retirement Credits." Accessed Oct. 15, 2020.
- Social Security Administration. "Fact Sheet." Accessed Oct. 31, 2020.
- Social Security Administration. "What You Need to Know When You Get Retirement or Survivors Benefits," Page 12. Accessed Oct. 31, 2020.
- Social Security Administration. "Your Payments While You Are Outside the United States." Accessed Oct. 31, 2020.
Irwin Fletcher has been writing since 2008, specializing in legal, finance and business topics. He earned his Bachelor of Business Administration in finance and real estate from Texas Christian University. Fletcher is also pursuing a Juris Doctor, focusing on environmental law, at Vermont Law School.