If you are self-employed, you have every right to apply for Social Security disability benefits, and to receive those benefits.
Every quarter — or possibly every year — you pay Social Security taxes as a self-employed individual. Whether this is through estimated taxes or through income tax in April, these paid taxes go to the Social Security general fund just like everyone else’s taxes. It does not matter whether a company employs you, or whether you employ yourself. You pay into that tax fund, and you have every right to receive the full Social Security disability coverage.
Understanding SSA Work Credits
As you may know, the Social Security Administration (SSA) issues work credits each quarter. These work credits demonstrate that a person has worked, and has paid taxes (or has had taxes paid on his or her behalf) that support the federal Social Security fund. When you are self-employed, you earn between one and four work credits each quarter.
If you earn $5,440 or more in a year (as of 2019), no matter what time of year this earning happens, you receive the maximum number of work credits: four.
The SSA looks at your last ten years of work — so looking for up to 40 work credits — to determine whether or not you qualify for the maximum amount of disability benefits. If you become disabled when you are young and recently in the work force, you may need as few as six total work credits to qualify for benefits.
These work credits qualify you for Social Security Disability (SSDI). However, the amount of your monthly disability payments is based upon how much money you earned, whether that is from regular employment or self-employment. The higher the income you claim on your tax returns, the higher your Average Indexed Monthly Earnings (AIME) is. The AIME fuels the calculation for your monthly disability benefits payout.
The key, as a self-employed person, is that you pay your self-employment tax. You pay this along with your income taxes. In 2019, the tax rate for the self-employment tax is 15.3%. 2.9% of that is for Medicare, and the remaining 12.4% is for Social Security. If you earn $132,900 or less, that income will be taxed for both Medicare and Social Security. If you earn more than that, anything above $132,900 is only taxed for Medicare at 2.9%.
You must demonstrate an inability to engage in “substantial gainful activity,” or “SGA,” to earn Social Security disability benefits. The SSA applies something called “The Three Tests” to figure out if your current counts as substantial gainful activity. Here are the Three Tests:
- Does this work provide significant services to the business and bring in $1,220 or more each month in average income ($2,040 or more each month if you are blind)?
- Is the work comparable to the work of persons without disability in your community engaged in the same or similar businesses?
- Is the work worth $1,220 or more each month in terms of its effect on the business or what it saves you from having to pay an employee to do that work?
The SSA will substract “unincurred business expenses” from your net earnings. These are expenses you do not pay for — contributions others make. If a vocational program donates tools for your work, or if a friend volunteers to help you, the value of both of these “gifts” is substracted from the net earnings of your business, so that the SSA can ascertain the value of your work as an individual.