Social Security and Self-Employment
Social Security regards income from self-employment differently than income from wage work. SSA also offers some work incentives specific to self-employment. Griffin-Hammis Associates, LLC has written a useful guide: Social Security Considerations for Small Business Owners with Disabilities (pdf). Additional information is provided below on concepts and work incentives specific to self-employment.
SSI Self-Employment Considerations:
Net Earnings from Self-Employment (NESE): The SSA uses NESE to determine monthly earned income from self-employment. To calculate NESE, SSA begins with annual net earnings (total income minus business expenses). Net earnings are then multiplied by 0.9235, a deduction that reflects Social Security taxes paid. This amount is then divided by 12 months to arrive at a monthly NESE figure.
NESE is what is used to calculate monthly SSI payments. The first $65.00 is disregarded (or $85.00 if there is no other unearned income), and one-half of the remainder. The remaining "countable" earned income is then subtracted from the SSI Federal Benefit Rate (FBR) to determine the SSI payment. SSI recipients must try to estimate as closely as possible their monthly profits to avoid large overpayments and underpayments.
Property Essential to Self Support (PESS): SSA will not "count" property that you use in a trade or business towards the $2,000.00 asset limit. The property that SSI doesn't count can be things like tools, equipment, or permits, and/or it can also be the liquid resources (cash) in your business account. Your business account can accumulate money well over the $2,000.00 with no adverse effect on your eligibility for SSI. PESS must be approved by the SSA. More information on PESS.
Find more SSI Work Incentives or download an SSI and Self Employment Fact Sheet.
SSDI Self-Employment Considerations:
Net Earnings from Self-Employment (NESE): The SSA uses NESE to determine monthly earned income from self-employment. To calculate NESE, SSA begins with annual net earnings (total income minus business expenses). Net earnings are then multiplied by 0.9235, a deduction that reflects Social Security taxes paid. If the business is seasonal, annual NESE will be divided by the number of months of distinct business activity. If the business is year round with no distinct periods of activity, annual NESE will be divided by 12 months.
SSDI recipients must try to estimate as closely as possible their monthly profits to avoid large overpayments and underpayments.
Trial Work Period (TWP): All SSDI beneficiaries are entitled to a TWP. A TWP is an opportunity to test one's ability to work for at least nine months. SSDI payments continue no matter how high the earnings. In 2008, a month is considered a TWP month when earnings are $670.00 or more. To complete the TWP, all 9 months must fall within a 5 year period.
For self-employed SSDI beneficiaries to use a TWP month, NESE must exceed the TWP monthly amount ($670 in 2008), OR, the individual must spend at least 80 hours engaged in the business during a month.
Substantial Gainful Activity (SGA): For SSDI beneficiaries, SSA uses the concept of Substantial Gainful Activity (SGA) to help determine eligibility for a payment after the TWP is completed. For wage earners, SGA refers to countable income at or above a level which is determined annually. In 2008, SGA refers to countable income at or above $940.00. For self employed individuals, determining SGA is a little more involved.
After a beneficiary has received SSDI for 24 months, SSA uses this test todetermine if beneficiary engaging in SGA. This is an SGA determination for purposes of cessation in month only:
- SSA compares beneficiary's countable monthly NESE to SGA earnings guidelines for that year. If monthly countable NESE averages more than SGA guideline amount ($940.00 in 2008), NESE is considered SGA.
If the beneficiary has been entitled to SSDI less than 24 months, or the beneficiary has not yet used the Cessation month during the Extended Period of Eligibility or during an EXR reinstatement period, the following three (3) tests apply:
- Is the self employed person performing significant services in the trade or business AND is he/she deriving substantial income from the trade or business?
- Is the work comparable to that of an unimpaired individual in the community?
- Is the work clearly worth more than the SGA level?
SSA will consider all three tests before determining that a beneficiary's self employment is not SGA.
Additional Self-Employment "Subsidies" for SSDI Benficiaries:
SSA will allow additional deductions from NESE when determining SGA
- Unpaid Help provided by family members, friends, or others who work without pay.
- Impairment Related Work Expenses (IRWE) are out-of-pocket expenses related to both a person's disability and work.
- Unincurred Business Expenses are contributed by someone other than the beneficiary. For example, DVR contributions to a business.
Find out more about SSDI Work Incentives.
For both SSI recipients and SSDI beneficiaries, a Plan for Achieving Self-Support (PASS) could useful in self-employment.
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