Reduction in Social Security Early Retirement for the Self-Employed

If you're self-employed and you claim early retirement benefits from Social Security (any time between age 62 and your full retirement age), your benefits may be reduced if you're performing "substantial services," even if you're not making income over the allowed limits.

How the Early Retirement Deduction Works

First, some background: Until you reach full retirement age, Social Security will subtract money from your retirement check if you exceed a certain amount of earned income for the year. For the year 2024, this limit on earned income is $22,320.

(Note, however, that any reductions taken from your retirement benefits for working are paid back to you over a 10-15 year period after you reach full retirement age. For more information, read our article on the penalty for working and collecting early retirement.)

Social Security has a special rule for small business owners because some people with their own businesses try to get around the income limit by continuing to work and paying a relative instead of themselves, or by continuing to run the business but being paid only for reduced work time, just to stay under the limit.

Self-Employment Rule

The rule is that, if you're self-employed, you can receive full benefits for any month in which Social Security considers you retired. To be considered retired, you must not have earned over the income limit and you must not have performed what Social Security considers substantial services.

The usual test for substantial services is whether you worked in your business more than 45 hours during the month (subject to some exceptions). For instance, if you worked between 15 and 45 hours per month and the work you did could be considered highly skilled, your work could be considered substantial services (more on this below).

But if you worked less than 15 hours, in no case will you be considered to have performed substantial services (you're considered retired, period).

What Are Substantial Services?

When considering when services are substantial, Social Security will look at the following factors:

• the amount of time the individual devoted to the business
• the nature of the services performed
• the nature of the services performed by the individual before retirement and after
• the type of business involved
• the presence or absence of an adequately qualified paid manager, partner, or family member who manages the business, and
• the amount of capital invested in the business.

15-45 hours per month

As mentioned above, if you worked between 15 and 45 hours in a month and the work you did could be considered highly skilled, your work will likely be considered substantial services. But where a person works from 15 through 45 hours in a month and can establish that the services weren't substantial, the person can be considered retired.

Services can be considered not substantial if both of the following are true.

• The person's gross earnings for services in a month are less than the monthly earned income limit.
• The person's monthly earnings are readily determinable (for example, the person receives an hourly fee for a personal service and doesn't have a significant investment in the business that could appreciate).

What Are the Early Retirement Income Limits?

The actual earnings limit varies depending on whether you'll reach full retirement in that year. You'll be considered retired this year if either of the following is true.

• You're under full retirement age for all of 2024 and your earnings are less than $1,860 that month and you didn't perform substantial self-employment services.
• You reached full retirement age in 2024 and your monthly earnings are less than $4,960 and you didn't perform substantial self-employment services.

What Information Will Social Security Ask For?

Social Security might require some extra information from you to prove you're not earning too much income or performing substantial services. The agency will want to see evidence that you're really giving up full-time work and not merely shifting your pay to someone else.

Will the SSA Ask Me for Documentation?

Social Security is likely to ask for information regarding your continuing involvement with your own business if any of the following are true:

• You maintain ownership of the business.
• Other family members are involved in the business and a relative is assuming most of your previous duties.
• You continue to work for the business at lower pay.
• You control the amount you work and how much you're paid, such that you could manipulate either one.
• Your relatives now receive the salary you previously earned.

What Documents Will the SSA Want to See?

Social Security might ask for some personal and business financial documents including:

• the business's pay and personnel records
• your personal and business tax returns
• any stock transfer agreements, and
• your business expense records.

Try to contact your local Social Security office several months in advance of applying for early retirement benefits so that you'll learn what documents Social Security wants and you'll have time to gather the documents.

What Happens if Social Security Decides You're Not Earning What You're Worth?

If Social Security determines that you provide services to the business with a value that exceeds the amount you're paid—based on the time you spend, the level of your responsibility, and the value of services you provide—Social Security might attach a dollar value to those services. If this dollar value, plus what you're actually earning, exceeds the amount of earned income permitted for your age, your benefits may be reduced.

How You'll Report Your Earnings When Collecting Early Retirement

If you're receiving early retirement and you receive substantial self-employment income, or you have income that varies widely from month to month, Social Security will request earnings estimates from you.

Toward the end of each year, Social Security will send you a form asking for an earnings estimate for the following year. The information you submit will be used to calculate your retirement benefits for the first few months of the following year, until they're adjusted with your actual self-employment tax information.

Once you reach full retirement age, you'll no longer need to report your earnings, because there's no Social Security limit on how much a person can work or earn after reaching full retirement age.

This original version of this article was based on an excerpt from Social Security, Medicare & Government Pensions, by Joseph Matthews (Nolo).