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How Do Self-Employed Workers Earn Quarters for Social Security?


Content provided for general information. Talk to your advisor to learn about recent updates or other rules that may apply to your situation.

If you’re self-employed, it’s important to understand how you earn Social Security benefits which includes having enough credits or quarters of coverage.

What is a quarter of coverage?

A quarter of coverage is also known as a Social Security credit. In order to qualify for Social Security retirement benefits, you need to have at least 40 credits.

You also need quarters of coverage to qualify for disability benefits if something happens to you.

  • Before age 24, you usually need 6 credits in the three years before your disability
  • From age 24 to 31, you generally need to have worked at least half the time since you turned 21
  • After age 31, you usually need 20 credits in the last 10 years

For both Social Security retirement benefits and Social Security Disability Insurance, you can earn up to 4 credits per year.

In 2023, you’ll need $1,640 in income to earn a credit. The dollar amount adjusts for inflation each year.

Once you reach four credits, you can’t earn additional credits during that tax year. And just to be clear, it’s only four credits total not four quarters of coverage for each job you have.

There’s also no way to buy Social Security credits if you don’t have enough.

What self-employment income counts for Social Security credits?

Your credits are based on the income that you pay Social Security taxes on. If you’re self-employed, that’s your net profit after you claim your business deductions.

Since you only need to earn $6,560 (in 2023) to max out your work credits, most self-employed workers won’t run into any issues here.

However, if you take a business loss, you won’t have a net profit to pay Social Security taxes on and won’t get generally won’t get credits for that year unless you had other earned income such as wages from a job. There are two ways to still get credits.

One way is if you had wage income you paid Social Security taxes on. This could be from another job or if you paid yourself a salary from your S-corporation.

The second way is to choose the Optional Method to Figure Net Earnings on IRS Schedule SE. This option generally allows you to choose to pay self-employment tax even when you had a business loss so that you can still get Social Security credits for that year. Unless you’re a farmer, you can usually only use this option five times in your lifetime.

To learn more, chat with a tax expert online.

See Also: Social Security Publication 05-10072Social Security Publication 05-10022.

How are your Social Security retirement benefits calculated when you’re self-employed?

We’re a lot of self-employed workers get tripped up isn’t in earning Social Security benefits but in their Social Security earnings record. Your Social Security benefits are a percentage of your average monthly earnings during the 35 years that you earned the most.

The good news is that if you did have a year with a business loss, your income for that year is $0 rather than a negative number.

Like with work credits, your retirement benefits go by your net profit from self-employment. So being aggressive with your deductions can reduce your retirement benefits.

The policy behind this makes sense. If you had business expenses you had to pay, that money wasn’t available as take-home pay for your personal expenses.

Of course, some people like to push the limits with their deductions. This can include things like fully deducting a phone plan when you also used the phone for business reasons or trying to classify your vacations as business trips so you can write them off.

Simply not reporting all of your income also reduces your earnings and Social Security benefits. So while I get why people try to avoid paying taxes, these are really things you should think about.

On the other hand, reporting too much income or not reporting deductions to receive benefits from Social Security, the Earned Income Tax Credit, or other sources can also be considered fraud.

What if I worked less than 35 years?

If you worked for less than 35 years, you get a $0 in your earnings record for the missing years. For example, if you only have 20 years of earnings, your benefits will still be based on your lifetime earnings divided by 35.

Note that the 35 years is from all of your work history combined not just one job or type of job. It can include part-time teenage jobs, full-time employment, different types of self-employment, and retirement jobs.

What if I don’t have enough work credits?

If you don’t have enough credits, you normally won’t be able to receive any Social Security benefits. There are no partial benefits for partial credits.

The only way to become eligible for benefits is to return to work. This could even be part-time work that’s just enough to max out your credits for the year until you have sufficient credits.

Are Social Security benefits based on my last three years of earnings?

No, the only things that matter are 1) having enough credits and 2) your highest 35 years of earnings. Unlike some pension plans, Social Security doesn’t go by your last X years of earnings.

The only thing that maxing out your income right before you retire does is increase your average lifetime income.

If your income is lower in your later years, it can never lower your benefits.* If you had more than 35 years of work history, Social Security goes by your highest 35 years not your last 35 years.

*Special rules apply if you’re receiving benefits below full retirement age while still working but you’ll normally see a temporary drop in benefits followed by an increase later on.

How do I know if I have sufficient credits to receive Social Security?

You can check how many credits you have, your lifetime earnings statement, and your expected benefits by viewing your Social Security Statement on the Social Security website SSA.gov.