Not all of our income affects our entitlement to Social Security benefits – only income subject to Social Security contributions, that is, wages from employment or from self-employment (earned income). Many other types of income, called passive income, are not subject to contributions, so they do not count toward retirement benefits. But the difference between these two types of income is not always clear.
A Real-Life Example
Ms. Alicja divorced her husband after 8 years of marriage. As consolation she was left with a 4-family house; her husband took a 6-family apartment building. Alicja knew she would not be entitled to spousal benefits and that she should take care of her own retirement. The house gave her a decent income, which she reported conscientiously, trusting that her accountant was paying Social Security contributions on it. On top of that, she earned a little extra cleaning for cash. When she once took a close look at her Social Security statement, she noticed that her projected retirement benefit would be… three hundred dollars. Why, when she had been reporting the rent she collected for years? The answer is: because passive income, such as rent from real estate, is not subject to Social Security contributions and is not counted toward retirement benefits.
How Social Security “Quarters” Work
To receive Social Security retirement benefits, you must work at least 40 quarters with sufficiently high earnings from work (earned income) and pay contributions on them under a legal Social Security number. In 2026 you must earn at least $1,890 (in 2027 – $1,970) to be credited with one quarter, or $7,560 (in 2027 – $7,880) to earn a full year of coverage. What counts are wages from employment or self-employment that are subject to Social Security contributions. But collecting 40 quarters is not enough, because after 10 years of minimum earnings the benefit is very small, barely over a hundred dollars.
It’s clear: the longer we work legally and the more we earn while paying taxes, the larger the Social Security retirement benefit we will receive.
Yes: Wages, Up to a Certain Limit
Employees’ wages are subject to Social Security taxes called FICA (short for Federal Insurance Contributions Act). The FICA tax, also called the payroll tax, is 15.3 percent and consists of two components: the Social Security contribution of 12.4% of wages, paid half by the employee (6.2 percent) and half by the employer (6.2%) up to a cap, which in 2026 is $184,500 (in 2027 – $192,300), and the Medicare contribution of 2.9% of total wages (with no cap), also split equally between employee and employer. Since 2013, high earners – above $200,000 a year ($250,000 for married couples filing jointly) – pay an additional 0.9% for Medicare (Additional Medicare Tax).
It follows that high earners do not pay Social Security contributions on their entire salary, only up to the cap ($184,500 in 2026, $192,300 in 2027). For this reason their Social Security retirement benefit is limited – in 2026 to $4,152 a month at full retirement age (in 2027 – $4,188).
Yes: Wages of Household Help
Housekeepers and household employees have the same rights and obligations as other employees. They are subject to FICA taxes if they earn $3,000 or more a year from a given employer (the 2026 threshold; in 2027 – $3,100). Only their wages paid in cash are taxed, not the value of meals or lodging. Exempt from FICA are, among others, the wages of household employees who were under 18 in a given year (unless household work is their principal occupation; for a student it is not), as well as wages paid to the employer’s spouse, child under 21 and – as a general rule – parent. Being a high school or college student does not by itself exempt an adult from contributions. A person who employs a housekeeper or a nanny is responsible for withholding the appropriate contributions and taxes and paying them to the government.
Conclusion: If a housekeeper works in the homes of several clients and earns less than the threshold from each of them per year ($3,000 in 2026, $3,100 in 2027), none of the clients is required to pay Social Security contributions for her. The only way for her to pay them and earn a retirement benefit is to file her own taxes as a self-employed person.
You can read more in Publication 926, Household Employer’s Tax Guide, https://www.irs.gov/pub/irs-pdf/p926.pdf.
Yes: Severance and Vacation Pay
If you did not use a few weeks of vacation, the HR department will convert them into pay and withhold income taxes and Social Security contributions from that amount. In other words, for Social Security purposes unused vacation counts just like time worked. The same applies to severance pay. Six months of severance pay is equivalent to six months of work.
Yes: Tips and Commissions
Good news for salespeople who work on commission. Commissions are treated as earnings, and Social Security contributions are paid on them. Tips of $20 a month or more also count as earnings – provided, of course, that you report them on your tax return.
Yes: Self-Employment
Self-employed people must file tax returns if their net earnings in a given year were at least $400. They pay the full Social Security and Medicare contributions themselves, which amount to 15.3% of net income (12.4% for Social Security and 2.9% for Medicare), plus income tax. Schedule C and Schedule SE, on which the Social Security contributions are calculated, are attached to Form 1040. The details are explained in the book “Jak oszczędzać na podatkach” (“How to Save on Taxes”). The form of payment – check, cash, transfer – does not matter.
No: Investment Income
Note: Social Security contributions are not paid on passive income, such as bank interest, dividends, capital gains, rent from your own apartment building (like Ms. Alicja’s), etc. Income of this kind is not taken into account in calculating Social Security benefits.
Rent from an apartment building is passive income not subject to Social Security contributions, unless you run a rental business and report income as a worker in that business. Talk to your accountant.
Note: If you have your own corporation and pay yourself not a salary but a dividend, that dividend does not count toward your retirement benefit, because it is classified as passive income. Many business owners whose inventive accountants minimized their taxes by paying out dividends come to their senses when they see a projection of a pittance of a retirement benefit.
No: Unemployment Benefits
Income tax is paid on unemployment benefits, but Social Security contributions are not. For this reason unemployment benefits do not count toward retirement, and time spent unemployed does not add any Social Security quarters.
Other public benefits (for example, SSI), pensions and Workers’ Compensation payments are also not subject to Social Security contributions.
No: Filing Taxes Jointly with Your Husband
Income taxes must be distinguished from FICA contributions. The basis for your own retirement benefit is the contributions paid under your own number to the Social Security Administration (FICA), not adding your name to a joint return with your spouse and paying joint income taxes to the IRS. When the husband works and pays contributions and income taxes, his coverage provides the basis for his own retirement benefit, as well as family benefits for a non-working wife and minor children.
A non-working wife does not pay Social Security contributions, so she does not earn her own retirement benefit, even though the spouses file with the IRS as married filing jointly. If the marriage lasted less than 10 years, then after a divorce the wife will receive neither her own retirement benefit nor spousal benefits, even though she filed taxes jointly with her husband.
Conclusion
Only your own earnings from employment or self-employment on which contributions were paid count toward Social Security retirement benefits. The longer we work and the more we earn, and the later we retire, the larger our retirement benefit will be. Still, a Social Security benefit alone will rarely ensure comfortable golden years. Besides it, it is worth having other income and significant savings.
What advice can we give Ms. Alicja? It is worth pointing out that owning a profitable apartment building is similar to receiving a pension, because it provides a regular cash flow and financial security. Ms. Alicja can always sell the building and live off the capital she gets.
Updated October 2026.
