Social Security provides you with a source of income when you retire or if you can’t work due to a disability. It can also support your legal dependents (spouse, children, or even parents) with benefits in the event of your death.
How Social Security Benefits Work?
When you work in the United States, you pay Social Security taxes. This Social Security tax goes into a trust fund that pays benefits to:
- Those who have already retired.
- To people with disabilities
- To the surviving spouses and children of workers who have died
Each year you pay in, you will get credits to help you become eligible for benefits when it is time for you to retire.
You can also pay into Social Security if you work outside the United States.
If you’re self-employed outside of the US, you may be required to pay Social Security taxes. It depends on the tax treaty between the United States and the country you’re living in.
How Do You Qualify for Social Security Benefits?
When you work and pay Social Security taxes, you earn “credits” toward Social Security benefits.
(Social Security Administration use your earnings and work history to determine your eligibility for retirement benefit OR Disability benefit Or your family’s eligibility for survivors benefits when you die)
The number of credits you need to be eligible for benefits depends on your age and the type of benefit. In the case of Social Security retirement benefits, you need 40 credits to qualify for Social Security old age (or retirement) benefits, and usually that is equivalent to 10 years of work. One can earn up to a maximum of four credits per year.
If you are self-employed, you earn Social Security credits the same way employees do. However, instead of having an employer deducting your Social Security taxes from your paycheck, Self-employed individuals must report their earnings for Social Security through filing federal tax returns and paying their taxes directly to the IRS.
If you stop working before you have enough credits to qualify for benefits, the credits will remain on your Social Security record.
If you return to work later, more credits may be added. The Social Security Administration cannot pay any retirement benefits until you have 40 credits.
Types of Social Security Benefits
Many people think of retirement benefits when they think of Social Security benefits.
But the Social Security Administration actually offers various types of benefits to those who have paid into the Social Security trust fund over a number of years, or to their family members.
– Social Security retirement benefits are the most common one. To qualify for this benefit, you generally need to have worked for at least 10 years. You must earn 40 credits before you can claim this benefit.6
– Another type of benefit is the Social Security Survivor Benefits.
Here, when the taxpayer dies, Social Security can continue to pay benefits to the spouse and children—and even to the parents, if the taxpayer was supporting them.
For your family to receive survivor benefits, you will need to have earned at least six Social Security credits in the three years before your death.
– Disability benefits support people who cannot work because of disabilities.
If you haven’t reached full retirement age but you’ve worked enough to meet the requirements, you could be eligible for benefits from the Social Security Disability Insurance.
To qualify, you must have a physical or mental condition that entirely prevents your working—and is expected to last a year or longer or result in your death.
How many credits you need for disability benefits depends on how old you were when your disability began.
Are Social Security benefits taxable?
Social Security Benefits may be taxed depending on one’s income and tax filing status.
If an individual taxpayer’s income exceeds $25,000, or a married couple filing jointly has income that’s more than $32,000, then they will be required to pay taxes on their Social Security benefits.
Disability benefits (SSDI) are subject to tax as well, but most don’t end up paying taxes on these benefits when they don’t have much other income.
Most states don’t tax Social Security benefits. However, some states (Colorado, Kansas, Vermont, West Virginia to name a few) tax social security benefits in certain situations, and each of these states has its own approach to determining what share of benefits is subject to tax.