Social Security Earnings Test

photo credit: jb

As you know, you can receive Social Security retirement or survivors benefits and continue working. If you happen to be less than Full Retirement Age (FRA) and you earn more than the earnings test, your benefit will be reduced. (Note: these reductions are not really lost, you will get credit for the withheld benefits at FRA.)

Earnings Test

If you’re at or older than FRA (age 66 if born between 1946 and 1954, ranging up to 67 if born in 1960 or later) when you begin receiving retirement or survivors benefits, you may earn as much as you like and your benefit will not be reduced. If, however, you are younger than FRA, your benefit will be reduced $1 for every $2 you earn over $18,960 (in 2021) before the year of FRA. The Social Security benefit will be reduced by $1 for every $3 you earn over $50,520 in the year of FRA, up until the month you reach FRA. These limits are adjusted every year with cost-of-living indices.

The income we’re talking about here is W2 (employee) income or self-employment income, referred to as earned income. Non-earned income, such as interest, dividends, pensions, retirement withdrawals, or rents received are not included for the purpose of the earnings test. Plus, in the first year that you start benefits, only that earned income after you’re receiving benefits is counted, on a monthly basis. Any income received before you start receiving Social Security benefits is not counted toward the earnings test.

For example, let’s say your benefit is $700 per month ($8,400 for the year) and you are 63 years old, starting benefits at 62. You work part-time and earn $22,000 during the year, which is $3,040 more than the earnings test. The Social Security Administration will withhold a total of $1,520 from your benefit ($1 for every $2 over the limit). This is done by withholding your Social Security benefit for three months, January through March of the following year – for a total of $2,100 being withheld. Beginning in April you’ll receive your full $700 benefit. In January of the next year you’ll receive $580 extra for the additional amount that was withheld above the $1,520. If you advise SSA of your income expectation in the coming year, the withholding will be done during the year of the income, rather than the following year. If your actual income differs from the expected income you reported, it will be “trued up” in January of the following year.

If this was the year you’ll reach FRA – for example in June, and your earnings through May were $52,000 ($1,480 more than the limit), $494 would be withheld from your $8,400 benefit which is accomplished by withholding your first check of the year, and the additional $206 will be refunded to you in January of the following year.

First Year

In your first year of Social Security benefits, you can earn as much as you like before you start to receive benefits. Then, for each month after you start your Social Security benefit, you are limited by the monthly amount (listed above) divided by 12. For 2021 that is $1,580 per month.

So, if you’re under FRA and worked for 8 months of the year in 2021 and started Social Security benefits in September, you can earn up to $1,520 each month (September thru December) without benefits being withheld. If you earn above that limit in any month, for each $2 over the limit, $1 will be withheld. This will occur with your first check(s) in the following year.

For every year thereafter (until your FRA year), the earnings test is applied on an annual basis, rather than monthly. So as long as you don’t go over the $18,960 limit (for 2021) you have no benefits withheld. As with the monthly test, for each $2 over the limit, $1 will be withheld.

FRA Year

In the year that you’ll reach FRA, there is an annual limit applied to your earnings. If you’re reaching FRA in August 2021, you are limited to earning no more than $50,520 prior to the month you reach FRA. For every $3 over that limit, $1 will be withheld.

Starting with the month you reach FRA, there are no earnings limits.