How to Get Disability Benefits If Self-Employed

By Bethany Laurence, J.D.

Most people who pay Social Security taxes (which qualifies 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.

How the Self-Employed Earn Social Security Credits

Just like employees, self-employed persons earn one credit for each quarter in which they earn a certain minimum amount of money. In 2011, you can earn one credit toward qualifying for Social Security benefits (disability, retirement, or survivor) if you make at least $1,120. If your net self-employment earnings are $4,480 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 $1,120 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 a self-employed business owner, you’ll report your net business profits (your gross earnings much allowable business expenses) rather than your gross earnings.

Paying the Self-Employment Tax

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 2011 is 13.3% (10.4% for Social Security and 2.9% for Medicare). (The 2010 Tax Relief Act reduced the self-employment tax by 2% for 2011.) For self-employment income earned in 2010, the self-employment tax rate was 15.3% ( 12.4% for Social Security and 2.9% for Medicare). For both 2010 and 2011, the first $106,800 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%).

Getting Disability Benefits as a Self Employed Person

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 (SSD) 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).

What Substantial Gainful Activity Means for the Self-Employed

The “inability to engage in substantial gainful activity” is required for receiving SSDI; in 2011, you can’t make more than $1,000 per month and qualify for SSDI (unless you are blind, in which case you can make $1,640 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:

• provides significant services to the business, which brings in $1,000 or more in average monthly income (in 2011)
• is comparable to the work of persons without disability in your community engaged in the same or similar businesses, or
• is worth $1,000 per month in terms of its effect on the business or what it saves you from having to pay an employee to do the work.

In addition, in judging your SGA, 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.

Starting a Disability Claim If You’re Self-Employed

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, 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 since you’re self-employed.