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.
Full Retirement Age for Self-Employed
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.
How Working Affects Your Benefits
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.
Special Rules for the Self-Employed
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.
What Counts as Earned Income?
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.
Final Thoughts on Social Security
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.
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Writer Bio
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.