Picture a contractor we’ll call Dan. For 35 years, he ran an electrical business, bought trucks and tools, claimed legitimate deductions, and kept taxable profit well below gross revenue. That lowered income and self-employment taxes while he was working. Now he is 67 and discovers that his projected Social Security benefit is much smaller than his business sales once suggested. Social Security generally credits net earnings reported through Schedule SE, not gross receipts. All income—including cash payments—must be reported, while allowable expenses must also be deducted. The issue is increasingly relevant: BLS data show about 22% of construction workers were 55 or older in 2025.
The Earnings Record Is the Whole Ballgame
Social Security calculates retirement benefits from the highest 35 years of wage-indexed covered earnings. Those years are totaled, converted into Average Indexed Monthly Earnings, or AIME, and run through a progressive formula to determine the primary insurance amount. For a sole proprietor, the IRS sends Social Security the net earnings reported on Schedule SE, not the company’s gross sales or the cash that moved through its bank account. Legitimate deductions for equipment, vehicles, supplies, depreciation, and other business costs can reduce current taxes, but they may also reduce the earnings credited to the owner’s Social Security record. Years with no covered earnings can enter the 35-year calculation as zeros.
The exemptions line on a Form 1040 tax form.
The Gap Is Real, but Not Dollar-for-Dollar
The original $1,600-versus-$2,600 comparison is too precise without Dan’s complete earnings history. Social Security indexes older earnings, uses bend points from the year a worker first becomes eligible at 62, and replaces a larger share of lower earnings than higher earnings. That means reducing reported net income does not cut the future benefit dollar for dollar, but years of consistently lower covered earnings can still create a meaningful lifetime gap. Cost-of-living adjustments do not repair that gap. The 2026 COLA is 2.8%, and it applies to the benefit already earned, so a smaller starting amount receives the same percentage increase but fewer additional dollars each month.
Selling the Business Does Not Repair the Record
Selling the company can strengthen Dan’s retirement balance, but it usually does not rewrite his Social Security history. A business sale must be divided among assets such as equipment, real estate, inventory, customer lists, and goodwill, and the tax treatment can include capital gain, Section 1231 gain, ordinary income, or depreciation recapture. Most sale proceeds are not covered wages or net self-employment earnings and therefore do not raise AIME retroactively. The important correction is that a filed benefit is not always frozen forever: if Dan keeps working and reports new covered earnings that replace a lower year among his highest 35, Social Security reviews the record and can automatically increase his benefit.
What Can Still Improve the Outcome
Dan still has several levers. His exact full retirement age depends on birth year: it is 66 years and 8 months for someone born in 1958 and 66 years and 10 months for someone born in 1959. Delaying benefits after full retirement age earns monthly delayed-retirement credits until age 70, at an annual rate of 8% for those birth years. Those credits raise the check, but they do not repair low earnings years. A spouse may qualify for a spousal benefit, and a surviving spouse may later qualify on the stronger record, although Social Security generally pays the higher applicable amount rather than two full benefits. Additional covered work can help if it replaces a zero or low year; IRA withdrawals and investment income do not.
What Business Owners Should Do Now
The practical move is to open a my Social Security account and review every posted year before choosing a retirement date. Missing or incorrect earnings should be challenged quickly: the ordinary correction window is generally three years, three months, and 15 days after the year involved, although exceptions exist. Business owners should compare estimates at several claiming ages, identify zeros and unusually low years, and ask a tax professional how major deductions affect net earnings subject to self-employment tax. The lesson is not to reject lawful write-offs. It is to measure the long-term trade-off and build retirement savings deliberately instead of assuming a profitable company guarantees a large Social Security check.
The image featured at the top of this post is ©Drazen Zigic / Shutterstock.com.