What income is used for the Annual Earnings Test?

Photo credit: jb

If you’re receiving Social Security retirement benefits and you’re under Full Retirement Age (FRA), you may be subject to the Annual Earnings Test. This is a test to see if you’re actually retired enough (per the Social Security Administration’s rules) to receive your Social Security retirement benefit.

You can read up on the rules about the Annual Earnings Test by clicking the link. Effectively, if you earn more than $18,960 (for 2021), then for each $2 over that amount in earnings, your Social Security retirement benefit is reduced by $1. If this is the year that you’ll reach FRA, for every $3 over the limit of $50,520 (for 2021), the reduction in your benefit is $1. Above FRA, there is no Annual Earnings Test.

But what earnings are counted toward the Annual Earnings Test? Read on, you may be surprised by at least one category of earnings that is counted.

Earnings counted toward Annual Earnings Test

As you might expect, any earnings that you have from a regular job that is covered by Social Security taxation is definitely included toward the Annual Earnings Test. In addition, your Net Earnings from Self Employment (NESE), upon which you are assessed the Self Employment tax, is included as well.

Added to the above are any earnings that have not been included for coverage purposes – specifically smaller amounts that are below the limits for Social Security coverage in the agricultural or domestic employment (and others). These amounts, however small, are included as earnings toward the Annual Earnings Test.

If you happen to have earnings that are above the covered amount – that is, if in 2021 your earnings are above $142,800 – then these amounts are also included toward the Annual Earnings Test. (I always thought this was a weird item to include, since even just including the full covered amount would put you over the Annual Earnings Test, but I suppose SSA is just covering all possible circumstances.)

After those excluded items have been added, we come to (what I consider) the surprising part: Also included for the Annual Earnings Test are earnings from a job that is not covered by Social Security. That’s right, even if your earnings are outside the system, they’re still counted toward the Annual Earnings Test and can possibly reduce your Social Security retirement benefit.

So, for example, let’s say you’ve worked for 40 years (between ages 22 and 62) in Social Security covered jobs, and then you decide to make a change to your career – now you’d like to go into teaching. You decide to take your Social Security retirement benefit at the same time. But hold on!

Even though your earnings from the teaching position are not included to possibly increase your Social Security benefit (and the truth is that they may have a downward impact on your benefit due to the WEP, but that’s another story), those earnings are counted toward your Annual Earnings Test. Therefore, if your only earnings at this point are from the teaching position, if it pays you more than $18,960 (2021 figure) and you’re under Full Retirement Age, you’ll experience withheld Social Security benefits due to the Annual Earnings Test.

It’s important to know that the non-covered earnings are only counted toward the Annual Earnings Test if they come from a US-based source. Earnings from a non-covered job that is not based in the US are not counted toward the Annual Earnings Test. Those earnings are subject to a more stringent (for most folks) test called the Foreign Work Test. In this test, essentially if you have any earnings from a foreign source that is not covered by Social Security, your Social Security retirement benefit is withheld for those months when you have earnings (if you’re under FRA).