Most people who pay Social Security taxes (qualifying them for disability benefits from the Social Security Administration) work for an employer and have their taxes withheld from their paycheck. There are also a fair amount of people who operate their own businesses or are otherwise self-employed; these people pay Social Security taxes on a quarterly or annual basis when they file their estimated taxes or income tax returns. Regardless of how Social Security taxes are paid, self-employed people are just as eligible for Social Security disability insurance (SSDI) benefits as if they were employed by another person or company.
Just like employees, self-employed persons earn one credit for each quarter in which they earn a certain minimum amount of money. In 2020, you can earn one credit toward qualifying for Social Security benefits (disability, retirement, or survivor) if you make at least $1,410. If your net self-employment earnings are $5,640 or more in a year (regardless of when the earnings were made, since you are self-employed), you earn the yearly maximum of four credits—one credit for each $1,410 of earnings during the year.
How many credits you need to qualify for SSDI depends on how old you are when you become disabled. No one needs more than 10 years of work, or 40 credits, in order to qualify for the maximum amount of benefits, and if you are young when you become disabled, you could need as few as six credits.
However, earning the minimum number of Social Security credits simply qualifies you for SSDI. How much your monthly disability payments would be if you become disabled depends on how much money you earned from self-employment (combined with any regular employment earnings). The more earnings you claim on your tax return, the higher your average indexed monthly earnings (AIME) will be, and the higher monthly benefit check you’ll get. Note that as a self-employed business owner, you’ll report your net business profits (your gross earnings minus allowable business expenses) rather than your gross earnings.
The “self-employment tax,” which self-employed business owners pay along with their income taxes, includes Social Security taxes and Medicare taxes. The self-employment tax rate for self-employment income earned in 2020 is 15.3% (12.4% for Social Security and 2.9% for Medicare). In 2020, the first $137,700 of self-employment income is subject to both Social Security and Medicare taxes; anything over that is subject only to the Medicare tax (2.9%).
If, when you become disabled, you haven’t earned enough credits as a self-employed person to qualify for SSDI, note that you can still apply for SSI (Supplemental Security Income), which is not dependent on your earnings record. Earning sufficient numbers of credits is only necessary in order to qualify for Social Security Disability Insurance (SSDI) benefits, which provide you with more disability income than the (SSI) program.
Whether you are applying for SSDI or SSI, the Social Security Administration (SSA) uses the same definition of disability and performs the same evaluation process to see if you are eligible for benefits. Before the SSA even looks at your medical impairments, it will look to see if you are engaged in “substantial gainful activity” (SGA)—that is, whether you’re working and making a certain amount of money (if you are, the SSA will consider you not disabled and will deny your disability claim).
The “inability to engage in substantial gainful activity” is required to be approved for SSDI or SSI disability benefits; in 2020, you can’t make more than $1,260 per month and qualify for SSDI (unless you are blind, in which case you can make $2,110 per month).
If you are self-employed, however, the SSA recognizes that your net profit isn’t necessarily a good indicator of whether you’re doing substantial gainful activity. Instead, the SSA will apply what they call “The Three Tests” to determine if your work activity is SGA. Your work will be considered SGA if you perform work that:
If you've been receiving Social Security disaiblity benefits for more than two years, this test is a bit easier to meet.
In judging your income, the SSA will deduct any “unincurred business expenses” from your net earnings, which are expenses that you don’t pay for—that is, contributions made by others. For example, if a friend volunteers for your business to help you out or if you receive equipment through a vocational training program, the value of these expenses is deducted from your net earnings to give the SSA a more accurate value of your work.
In order to file any type of disability claim through the SSA, you must fill out an application and provide medical documentation of your medical condition(s) that makes you unable to work. You can fill out an application online (for SSDI), or you can visit your local SSA office and fill out an application there. In addition to any medical records that you can provide to the SSA, you typically must sign release forms to allow the SSA to request any additional records that they need in order to review your claim. You’ll also need to submit your past tax returns because you’re self-employed.
Updated September 23, 2020