Self-employed business owners can claim early retirement benefits from Social Security any time between ages 62 and 65. Many factors should be considered before choosing to take early retirement because it will result in less involvement in your business. If you still have a passion for your business or want to remain heavily involved, this would not be the right choice for you. Here are some things to consider before making the decision to retire.
There are limits to the income and number of hours you can continue to work in your business and collect early retirement benefits. The income limits vary from year-to-year depending on when you will reach full retirement, and the hour limits are currently set between 15 to 45 hours per month. Consult Social Security to verify limits and other restrictions for the self-employed retiree.
The self-employed have an additional condition when collecting early retirement, even if they are within hourly and income limits. If they perform what is considered by Social Security to be substantial services, early retirement benefits may be reduced or eliminated. Social Security implemented this provision because small business owners were collecting early retirement while still taking on most of the work and paying a friend or family instead of themselves to remain under the limits.
Substantial services are not just the number of hours, even if you legitimately limit working in the business to between 15-45 hours. If the duties they perform are considered highly-skilled, this is defined by Social Security as substantial services as well. This could mean you are the only person in the business that can perform the skill or that the duties performed require high-level training.
Social Security considers the following when determining if the early retiree is performing substantial services.
- The type of services performed
- The type of business involved
- The comparison of services performed before and after retirement
- The presence and performance of a business manager
- The amount of capital the retiree has invested in the business
- The duties performed are considered highly skilled
To determine if a person is genuinely retired and not performing substantial services, staying within and income limits, and working the limited 15 to 45 hours monthly, Social Security may audit the business and require more information. These inquiries will only be made if you maintain ownership of the business or continue to work within the business or both.
When considering early retirement, contact Social Security in advance to find out the current limits and to determine what documents are needed to collect early retirement. After retirement, if Social Security determines at any time that you are exceeding the limits, your retirement benefits may be reduced or eliminated. For self-employed early retirees, each year of early retirement, Social Security will request earnings estimates for the following year. This estimate will determine retirement benefits for the first few months of the year and adjusted according to accurate self-employment information. Once full retirement is achieved at age 65, all limits are lifted, and there are no further criteria for the self-employed retiree.
If you are self-employed, being able to retire early and collect benefits may be a good option. But before you take steps to retire early, determine if you are genuinely ready to give up the business or reduce your involvement. Social Security sets strict early retirement limits, and if you are not prepared to stay within them, then early retirement is not for you. There is nothing that says an entrepreneur or small business owner has to retire at 62 or 65. If you are enjoying what you do and unable to give up the business, don’t force it. But if you are ready to close the business or give over the reigns, this information will help you do it as early as 62.