Q & A
Is the earnings limit different if you’re self-employed?
Complete Question: I am currently self-employed and will be starting my Social Security benefits this year. I keep hearing that the annual earnings limit is different if you are self-employed, but don’t know how it’s different. Can you explain how this will affect me? I don’t have other job income and I am 64 years old if that makes a difference.
Answer: You are absolutely right that self-employment earnings are calculated differently. Not only that, but your first year of retirement (since you will be retiring this year) is calculated much differently for self-employment. There are three key differences between self-employment income and W-2 income from another job when it comes to the Social Security earnings limit. I will start with the least complex difference.
The first thing you need to look at is when you earned the income versus when you received the income. People who work for an employer count the income (for Social Security purposes) when they earn the money, whereas self-employed people count the income when they receive it. Therefore, if you do construction work, for example, in November 2015 and are paid for it in January 2016, the income will count in 2016.
The second thing you want to look at is your net income versus your gross income. Typically, gross income is used to calculate the annual earnings limit; however, self-employed professionals are allowed to use their net income.
Finally, and this is the most complicated aspect, the “special rule” for your first year of retirement is much different when you are self-employed. Instead of Social Security looking at your monthly income, they will look at the number of hours you work. The general rule is that if you work more than 45 hours in self-employment in a month, you will not receive a benefit check for that month. If you work less than 15 hours in self-employment, you will receive a full benefit check. If you work between 15 and 45 hours, Social Security will decide whether or not you get a check based on the work you do – if you are working a job that requires a lot of skill, or you are managing a sizable business, than anything over 15 hours is too much to receive a check.
So what is “requiring a lot of skill”? Unfortunately that will be decided by Social Security. The rulebook says hours that “were spent in a highly skilled occupation” and of course this is a bit ambiguous. The good news here is that if you do not receive a payment for any month, you benefits will increase as if you wanted to file. For example if you file in June, 2015 and do not receive a benefit check due to work in July, August, or September, 2015, then your benefits will be recalculated as if you actually filed in September, 2015 (a three month boost).