If you are considering starting a business or working on your own, you should know that Social Security's regulations on earned income (wages) generally favor self-employment. You should also understand how Social Security measures self-employment income and what effect it will have on your benefits.
Self-employment is advantageous for people on disability benefits. You can work as health permits, you don't have to explain down-time or long gaps on resumes to an employer or worry about HIV discrimination.
Where benefits are concerned, the advantages of working for yourself come from the way Social Security calculates self-employment income. That can translate into more cash in your pocket.
For disabled people who return to work as employees, Social Security measures work activity by gross monthly wages.
For the self-employed, however, only net profit counts as earnings. This means you can take all the business expense deductions that are built into the federal tax code, and into Social Security's own regulations governing self-employment.
To make the most of these deductions, however, you will need to keep accurate records and master the federal tax forms for self-employment. Without solid documentation, any dispute over net profit between you and Social Security will come down to your word against theirs. In those cases, generally, you lose.
Social Security has different rules for self-employment for people collecting Supplemental Security Income (SSI) and Social Security Disability Insurance (SSDI). If you collect money from both payment programs, you will have to observe both sets of regulations.
People on SSI can work and still collect benefits, depending on how much they earn. Social Security measures income for employees in gross monthly income. The first $85 you earn each month is exempt. Then, Social Security will deduct half of your gross monthly wages above $85 from your benefit. Part-time wages of $485 a month would result in a $200 deduction from your SSI check.
For the self-employed, Social Security deducts from SSI benefits based on net profit. If you run a business, and earn $10,000 a year, but you show a net loss, then in Social Security's eyes, you have no earned income, and no deductions from your benefit.
To establish net loss, Social Security will accept federal income tax returns, then other documentation you can provide, and, finally, your own allegations on your business expenses. Net losses from self-employment can also be used to offset other earned income from regular employment that might result in deductions from your SSI benefits.
The rules for working on SSDI -- including the rules governing self-employment income -- are more complicated.
On SSDI, beneficiaries can earn any amount of money for nine months (called the Trial Work Period or TWP) before wages affect benefits. If the wages are above $700 a month in gross income for the TWP or go above $700 later, SSDI may "suspend" your benefit (but not your Medicare or disability claim) because you are engaging in what they call "substantial gainful activity" (SGA).
When SSDI suspends benefits because of SGA, the beneficiary is put on a three-year period of extended eligibility. During that time, you can go back on benefits if your wages drop below SGA because of poor health.
For the self-employed, SSDI measures earned income by net profit, not gross monthly wages. Here again, a self-employed person operating a thriving business could conceivably reduce the amount that Social Security counts as wages to the point where countable income drops below SGA level.
However, there are complications for self-employed people on SSDI that do not come into play for people on SSI. Even when a self-employed person on SSDI shows little profit or a net loss, Social Security has other standards it can use to measure work activity.
Social Security could, for instance, establish SGA level work by comparing the work you do in your business with that of non-disabled self-employed people engaged in the same type of business. Or, they can try to figure out if your self-employment is clearly worth more than the reported income indicates (in other words, you are taking too many deductions).
Social Security could also look at the number of hours worked every month, as opposed to wages. If, for instance, you work at your own business for more than forty-five hours a month, Social Security could decide that your work activity is significant even if your earnings are not. This rule could apply to a real estate agent who works a lot, but fails to bring in a commission.
Or, if you worked between fifteen and forty-five hours a month in a highly skilled occupation (like a physician), Social Security could again maintain that you were performing significant services.
If, however, you work less than fifteen hours a month, even if you get paid well for your self-employment, Social Security will generally not consider that amount of work to be significant services or SGA level work.
These various tests of the significance of self-employment and income involve a slew of complications, judgment calls, and the experience of the Social Security disability officer reviewing the situation. At best, a decision is likely to be a messy one.
Some offices may interpret different rules differently. Even Social Security's own employees admit that SSDI self-employment cases are tough to adjudicate. Such cases often end up going into appeals, and then an Appellate Court judge makes the decision.
If you are collecting benefits, and plan to earn money from self-employment, there are a few things you can do to protect yourself and take advantage of all allowable deductions.
Keep good records of the hours you work each month, and the amount of income you earn. If possible, get written statements from contractors or employers.
File federal self-employment income taxes. Social Security will accept net profit amounts from the tax forms, even if you do not actually file the forms or the Internal Revenue Service challenges your expenses, losses, etc.
Find out what other deductions are allowable from countable income, based on Social Security's regulations on self-employment. You can, for example, take deductions for unpaid assistance you receive from family or friends. Most benefits counselors have this information.
Consult a benefits counselor at AIDS Project Los Angeles or another AIDS-service provider before you talk to Social Security. Again, you will need well-kept records and tax forms.
Finally, if you are self-employed or operating your own business and cannot manage your own books, get a tax accountant. Benefits counselors and Social Security employees will not do the work for you. If your records are a mess, or missing altogether, and your case comes down to your word against theirs, Social Security often wins.
For more information about self-employment and Social Security benefits, contact AIDS Project Los Angeles' Work Services Program at (323) 993-1659.
Phil Curtis manages AIDS Project Los Angeles' Work Services Program. He can be reached by calling (323) 993-1659 or by e-mail at firstname.lastname@example.org.