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All About Social Security Credits

You earn them by working, and they'll determine when you can receive benefits

Hinden: How You Earn Social Security Credits

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Social Security credits should be factored into your retirement financial planning to receive maximum benefits.

Q. In reading up on financing a retirement, I've been running across references to a need for Social Security credits. What are these credits? How do you earn them? And how many do you need to qualify for Social Security benefits?

A. Basically, Social Security credits are accounting units that you earn when you work and pay Social Security taxes. In 2015, you get one credit for every $1,220 that you earn in wages. By earning $4,880, you get four credits, which is the maximum you can receive in one year.

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Down the road, the number of credits you've accrued over your working life will become very important for you: They'll determine whether you can qualify for three types of Social Security payments: retirement benefits, disability benefits and survivor benefits for your family members.

Credits are a key part of how Social Security functions: The system provides "earned benefits" — payments don't just show up in your bank account once you reach a certain age. You've got to qualify with a minimum number of credits, earned by working.

Q. How many credits do you need for retirement?

A. For most people these days, the number is 40. But people born before 1929 were able to retire with fewer credits — 39 for birth dates in 1928, 38 for birth dates in 1927, etc.

Q. How many credits do you need to qualify for disability benefits?

A. It depends on your age when you become disabled. For instance, a person disabled before age 24 may qualify if he or she has six credits in the three-year period ending when the disability started. But someone who suffers disability at age 31 or older will generally need at least 20 credits in the 10 years before the disability occurred.

You can find this laid out in detail in the publication "How You Earn Credits".

Q. How many credits are needed for my family to qualify for survivor benefits?

A. Again, it depends, on your age when you die. The younger you are, the fewer credits you need. The agency can pay benefits to your children and a spouse who is caring for your children if you accrued as few as six credits in the three years just before death at a very young age.

Q. What about an older worker who dies?

A. The older worker may need as much as 10 years of work.

Q. Do credits affect Medicare eligibility?

A. Yes. They're an important part of the formula that determines whether you can sign up. Generally speaking, if you've turned 65 and have at least 40 credits, you qualify for Medicare.

Q. What happens to the credits you've earned if you change jobs or stop working for a while?

A. Nothing. The credits remain on your record at Social Security. When you return to work, you can add more credits.

Q. You said that to earn credits, you have to earn a certain level of wages. So what is Social Security's definition of wages?

A. Social Security defines them as "all payment for services you perform for your employer." Wages include bonuses, commissions, fees, vacation pay and severance pay. Types of income that are not wages include capital gains, gifts, inheritances, investment income and pay for jury duty service.

Q. Do cash tips count as wages?

A. Yes, if the tips total $20 or more a month. That includes tips you receive directly from customers and tips that customers include on their charge cards and that your employer passes along to you. But noncash tips, such as passes, tickets or services, do not count as wages.

Q. How about loans?

A. Loans from your employer to you do not count as wages, unless you pay off the debt by working for the employer.

Q. Does vacation pay count?

A. Vacation pay and the pay you may receive instead of taking a vacation count as wages.

Q. And meals and lodging?

A. Meals and lodging do not count if they are provided to you at work for your employer's convenience. As you can see, the rules can get pretty esoteric. There's even one for life insurance renewal commissions. If you're a life insurance salesperson, you may get paid commissions when a client renews a policy that you sold to the person years earlier. Those commissions generally count as wages, even if you and the insurance company are no longer connected or you are retired. The key test is when the sale was made and the circumstances of the sale.

Q. What if you're self-employed?

A. Generally, your net earnings — your gross income minus your expenses — are counted as the equivalent of wages. You earn credits for self-employment at the same rate as if you were working for someone else.

Q. Finally, what are "quarters of coverage?"

A. Before 1978, employers reported your earnings to Social Security every three months and credits were called "quarters of coverage" or QCs. In those days, you got one QC if you earned at least $50 in a calendar quarter.

But in 1978, the rules changed. Employers began reporting your earnings to the IRS and Social Security once a year. Credits are now based on your total wages and self-employment income during the calendar year, no matter when in the year you do the work. You can take all year to earn your four credits, or you can earn those credits in a much shorter period of time.

Stan Hinden, a former columnist for the Washington Post, wrote How to Retire Happy: The 12 Most Important Decisions You Must Make Before You Retire. Have a question? Check out the AARP Social Security Question and Answer Tool.

AARP financial ambassador Jean Chatzky suggests waiting to claim Social Security benefits so your monthly check will be higher.

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