When a person is an employee of a company, both the employee and the company pay taxes to the Social Security Administration (SSA) for disability insurance. If you are self-employed, you are eligible for disability benefits as long as you have paid Social Security taxes to the SSA. In addition, all workers (either self-employed or not) must have enough work credits to meet the SSA’s definition of disability to receive benefits.
The taxes that an employee pays for Social Security Disability Insurance (SSDI) are part of FICA taxes (Federal Insurance Contributions Act). The portion that pays for Social Security are usually called OASDI taxes (Old Age, Survivors, and Disability Insurance) on an employee's paycheck. (The Medicare portion of the FICA tax is sometimes called FICA-HI, where the HI stands for Hospital Insurance.)
When you are self-employed, Social Security ad Medicare taxes you pay are called called SE (self-employment) taxes, or SECA (Self-Employment Contributions Act) taxes. The SE tax actually consists entirely of Social Security and Medicare taxes; the taxes are apportioned between the two. The self-employed generally file a Schedule SE (IRS 1040) at tax-time and pay the SE taxes when they file it. You can learn more about self-employment tax at the IRS website. You may also want to consult a tax professional to make sure you are compliant with the IRS's requirements.
If you have enough work credits, you are eligible for Social Security benefits like SSDI, retirement, and survivor benefits.
In 2013, you must have earned at least $1,160 to get one work credit. If you earn at least $4,640 in a year, you can receive four credits, which is the maximum number of credits allowed per year, regardless of whether you are self employed or work for someone else. If you are self-employed, the SSA will use your net earnings to calculate your earned credits.
The number of credits you need for SSDI depends primarily on your age; however, anyone who has earned at least 40 credits in a ten-year period is entitled to benefits. Also, 20 of those credits must have been earned in the ten years just before you became disabled (unless you are blind). This rule, however, does not apply to workers 31 years old and younger.
Here are some examples:
For more information, you can review our work credit chart.
Self-employed people who earn less that the amounts discussed above can get work credits using an optional reporting method, but this method can be used only five times during a lifetime (for five different years). For more information on the alternative reporting method, visit the If You're Self Employed publication on SSA’s website.
Farmers and growers are able to use the alternative reporting method every year and have different earnings requirements. For more information contact the SSA or visit its website and review the publication A Guide for Farmers, Growers, and Crew Leaders.
Your work credits do not determine benefit amounts, only eligibility. Your benefit amount will depend on the amount of earnings you report to the SSA. This includes any amounts earned as an employee in addition to earnings you make from self-employment.
To determine your exact benefit amount ,the SSA uses a complex formula to calculate your “average indexed monthly earnings,” or AIME. The SSA website has some examples of benefit calculations. Also, if you want to see your current estimated Social Security benefits, you can view them on the SSA's online Social Security statements page, but you must create an online account first.
by: Melissa Linebaugh, Contributing Author