Does Small-Business Income Affect Social Security?
The Social Security Administration places limits on the amount of income you can receive and still get full Social Security Benefits. These limits only apply if you are under full retirement age. You can calculate your retirement age based on Social Security Guidelines. It is either 66 or 67. However, you can claim benefits at age 62. Your small business income can affect your benefit if you are not of full retirement age.
As of October 2012, if you have not yet reached your full retirement age, the Social Security Administration limits your income to $14,640 gross wages or net self-employment before your benefit gets reduced. After that amount, the SSA deducts $1 in benefits for every $2 you earn. If you reach full retirement age in 2012, the SSA deducts $1 in benefits for each $3 you earn over $38,880. This lasts until the month you reach full retirement age, when you will receive full benefits and have no income limits.
The difference between wages and self-employment income can be significant in calculating your SSA benefits. The SSA counts gross wages, but it only counts net business income toward the income limit. You can deduct all business expenses for your small business before notifying the SSA of your income. For example, your business could have gross receipts of $30,000, with expenses of $20,000. This would mean your income was only $10,000, so you could receive your full benefit if you are not of full retirement age.
The SSA gives small business owners a break by not fully counting the net income. It multiplies .9235 times your net earnings and only counts that much. In other words, the SSA only counts a little more than 92 percent of your net income from a small business. This allows you to earn more before your benefit gets reduced.
If you make enough money that your benefit gets reduced, you get higher benefits at full retirement age. The SSA compensates you for the amount your benefit was reduced by adding it back in when you reach full retirement age. This means you can get a partial benefit while operating your small business before full retirement, then get your full benefit at full retirement age and report your business income from there forward with no penalty.