What Are Substantial Services in Self-Employment?
If you're self-employed and collecting Social Security, understand how the nature of your work, not just your earnings, can affect your benefit payments.
For self-employed individuals receiving Social Security retirement benefits before their full retirement age, the Social Security Administration (SSA) evaluates whether their work constitutes “substantial services.” This determination is part of the annual earnings test for the self-employed. The nature and extent of your business activities, not just your income, can directly influence the amount of benefits you receive.
The Social Security Earnings Test and Self-Employment
The SSA applies an annual earnings test to individuals who claim retirement benefits before their full retirement age and continue to work. If a beneficiary’s earnings exceed an income limit, their Social Security benefits are temporarily reduced. For 2025, the earnings limit is $23,400 for those under full retirement age for the entire year. In the year an individual reaches full retirement age, a higher limit of $62,160 applies to earnings in the months prior to reaching that age.
This framework presents a unique situation for self-employed individuals. Unlike an employee, a self-employed person’s net earnings might be received at a time that does not directly correspond to when the work was performed. To address this timing discrepancy, the SSA uses a “services” test to determine if a self-employed person is truly retired for a given month. This evaluation of work activity ensures that benefits are correctly paid based on when work occurs, not just when income is recognized.
Tests for Determining Substantial Services
The Social Security Administration uses a few tests to determine if a self-employed individual’s work activity is substantial. The primary method is the hours-worked test. If you devote more than 45 hours per month to your trade or business, your services are considered substantial. This equates to roughly 10 to 11 hours per week, a threshold that can be met even in part-time ventures.
Another evaluation is the highly-skilled occupation test, which applies when an individual works between 15 and 45 hours in a month. If the services are in a field requiring a high level of skill or expertise, the SSA may deem them substantial even if the 45-hour threshold is not met. For example, a specialized surgeon consulting for 20 hours a month is likely providing substantial services due to the high value of their work.
The SSA may also use a comparison test, looking at the services you provide in a month relative to the work you performed before receiving benefits. If the time, energy, and skills dedicated to your business are not significantly different from your pre-retirement levels, the SSA could determine your services are substantial. The agency may request business records or a description of your duties to make this determination.
Calculating Net Earnings Subject to the Test
When the SSA applies the earnings test, it looks at your Net Earnings from Self-Employment (NESE). This is not your gross business income, but the amount you report on Schedule SE (Form 1040), Self-Employment Tax. NESE is calculated by taking your gross income from your trade or business and subtracting all allowable business expenses. It is the same figure used to determine your liability for Social Security and Medicare taxes.
The SSA is concerned with income from active work, not passive returns. Several types of income are not counted against the earnings limit, including:
- Pensions, annuities, and IRA distributions
- Interest and dividend income from savings, stocks, or bonds
- Capital gains from the sale of property or investments
- Royalties from patents or copyrights obtained before you reached full retirement age
Rental income from real estate is also not considered earnings unless you are a real estate dealer or provide significant services to tenants. This effectively means you are running the property as a business.
Reporting Earnings and Impact on Benefits
You must report your estimated annual earnings to the Social Security Administration if you expect to exceed the limit. This can be done by phone, in writing, or through your online “my Social Security” account. Providing your best estimate as early as possible and updating it if circumstances change helps the agency adjust your benefits correctly and avoid large overpayments.
For every $2 you earn above the annual limit of $23,400 in 2025, the SSA will withhold $1 in benefits. In the year you reach full retirement age, the rule is more generous: $1 is withheld for every $3 you earn above the higher limit of $62,160. The SSA withholds full monthly benefit checks to cover the reduction rather than reducing each payment by a small amount.
A special rule, known as the “grace year,” applies during your first year of retirement. This rule allows you to receive a full Social Security check for any month you are considered retired, regardless of your total annual earnings. For a self-employed person, being “retired” in a month means your earnings are below the monthly limit ($1,950 in 2025) and you do not perform substantial services. This monthly test is only available for one year, providing a transition period as you move into retirement.