Note: Social Security earnings limits change each year. This article is written with 2018 numbers.
Many people are surprised by the Social Security income limits. At one of my first speaking engagements, a lady came up to me and told me her story. She was in a bridge club with several other women, and one day the topic turned to Social Security benefits. The consensus around the table was that filing at 62 was the smartest thing to do. This lady, trusting the advice of some of her closest friends, filed for benefits as soon as she turned 62.
She told me that she’d always wanted to buy a brand new Toyota Camry. She figured that now was the perfect time to buy this car. She was still working and her Social Security check would be extra income. So that’s exactly what she did: she bought the car, and took out a car loan to be paid with her Social Security benefits.
A few months later, she received a nasty letter from the Social Security Administration stating that she had been paid benefits that she was not eligible for. They asked her to pay the benefits back and informed her that she her benefits would be suspended due to her income. Now she had a new car, and a car loan, without the Social Security benefits to pay for it.
The culprit…the Social Security earnings limit.
Note: If you’ve already received an overpayment notice, see my article on the steps you should take.
What Is The Social Security Earnings Limit?
This is one of those slightly complicated rules, and the details change as your age changes.
For people who start receiving Social Security benefits before full retirement age, there is a limit on how much money can be made while working without impacting your benefits. If your income exceeds the Social Security income limit for your situation, your Social Security benefits will be reduced proportionally. The amount of reduction depends on your situation.
There are different limits in the first year that you begin taking benefits, for each subsequent year, and for the year in which you reach full retirement age. After you reach full retirement age, there is no penalty for any level of earning.
How Much Can You Earn From Working While On Social Security?
The Social Security income limit depends on where you are in the Social Security timeline.
The Year That You Begin Receiving Benefits
Starting benefits mid-year is common, and it would be a problem if the first year’s allowable income wasn’t adjusted to account for the income earned before benefits started. Therefore, the income limit is calculated on a pro-rated basis for the remainder of the year during which benefits are first received. The income limit is different if you start receiving benefits in a year prior to the year in which you will reach full retirement age, or if you start receiving benefits in the same year in which you will reach full retirement age.
Scenario One: Retiring Mid-Year, Before The Year You Reach Full Retirement Age
To calculate your allowable earnings for the year in which you begin receiving Social Security benefits, multiply the number of months remaining after you begin receiving benefits times $1,420. This is the limit on how much income you may earn in the months between the time you start receiving benefits and the end of the calendar year. For example, if you started receiving benefits in July, you would be able to earn $8,460 (6 months X $1,420 per month) between July and December without hitting the Social Security earnings limit.
Scenario Two: Retiring Mid-Year, The Year You Reach Full Retirement Age
If you start receiving benefits in the same year that you will reach full retirement age, but in a month prior to reaching full retirement age, you will have a limit for the months between the two events. The limit for earnings from working while on Social Security is calculated at $3,780 per month times the number of months between the date of retirement and reaching full retirement age.
The Years Between The Year You Begin Receiving Benefits And Your Full Retirement Age
For each full calendar year between the year you begin receiving Social Security benefits and the year that you will reach full retirement age, you may earn up to $17,040 before your benefits are reduced.
The Year In Which You Will Reach Full Retirement Age
The year that you will reach full retirement age, you have a different limit. In the months before you reach full retirement age, you may earn up to $45,360 without a reduction in benefits.Oddly, the limit is the same if you reach full retirement age in February or in December.
Once you reach full retirement age, there is no reduction in benefits regardless of your income level.
How Much Will My Social Security Benefit Be Reduced?
There are two levels of benefits reduction.
For each year before the calendar year in which you will reach full retirement age, you will lose $1 in benefits for every $2 that you earn beyond the Social Security income limit.
In the year during which you will reach full retirement age, you will lose $1 in benefits for every $3 that you earn beyond the Social Security income limit.
Let’s take the example of Rosie Retiree. Rosie is 63 years old. She started taking her Social Security benefits as soon as she turned 62 in 2015. Full retirement age for her birth year is age 66. She is eligible for $20,000 in Social Security benefits per year. Rosie worked during the year, and she made $27,040 in wages. How much was Rosie’s benefit reduced by working while on Social Security?
First, we calculate how much Rosie was over the Social Security earnings limit for her age:
$27,040 Total Wages
– $17,040 Social Security Income Limit
$10,000 Income In Excess Of Limit
Because this is a full calendar year during which Rosie is receiving benefits but is not yet full retirement age, the benefits reduction amount is $1 reduction for every $2 in wages.
The benefit reduction calculation would appear as follows:
$10,000 Income In Excess of Limit
X 50% ($1 reduction for every $2 over limit)
$5,000 Benefit Reduction
With the benefits reduction for exceeding the income limits, Rosie Retiree’s $20,000 yearly allowed benefit is now a $15,000 benefit for the year.
How Benefits Are Reduced
One of the most confusing parts is how Social Security reduces your benefits. Instead of taking out a little bit every month, they will probably withhold several months of benefits at a time. When the benefits will be withheld depends on when you report the income.
If you predict in advance that you will have excess earnings, and report this to the Social Security Administration, they may take a few months of benefits after you report the anticipated excess earnings.
If you don’t report that you will have excess earnings before it happens, then you will have to report this information after the fact. This may be done through your income tax filing or through a separate reporting to the Social Security Administration.
If you wait for the Social Security Administration to learn of your excess earnings from your tax return, then there could be a significant gap between the time you earn the excess income and the time that your benefits are withheld. In most cases, it is better to report the excess earnings quickly that the benefits reduction will occur closer to the time the excess income is earned.
Regardless of whether your benefits are withheld in advance or in arrears, benefits withholding can make budgeting and planning difficult, especially if you don’t understand the system.
What Kind Of Income Counts As Earnings?
The Social Security income limit applies only to wages and net earnings from self-employment. All other income is exempt, including pensions, interest, annuities, IRA distributions and capital gains.
The term “wages” refers to your gross wages. This is the money that you earn before any deductions, including taxes, retirement contributions, or other deductions. From the Social Security Adminstration’s publication, How Work Affects Your Benefits,
“We do count an employee’s contribution to a pension or retirement plan, however, if the contribution amount is included in the employee’s gross wages.”
That’s pretty clear. The amount of income used to determine whether or not you are subject to the earnings test is your gross wages.
As always, once you attain full retirement age, there is NO earning limit.
Special rule if you are self employed
For those who are self employed, there is an additional test that will apply. Not only must you earn less than the income limit, but you are also limited to the about of time you can work. This rule is meant to prevent a business owner from continuing to work and but getting around the income limit by simply rearranging payroll.
The Social Security Administration refers to this as “substantial services” and generally limits the amount you can work in your business to 45 hours during the month. However, if your work his considered highly skilled, the hourly limit could be as low as 15 hours. In any case, if you worked less than 15 hours in a month you will not be considered to have performed substantial services.
It’s likely that the SSA will require some additional information from you to prove you are not performing substantial services. They’ll want to see some more information about your involvement with your business if you maintain ownership, if a relative is assuming most of your previous duties, you continue to work for the business but ‘lower’ your pay, and a number of other factors. Before you file, be prepared to produce documents like the business’s pay and personnel records, tax returns (personal and business), any stock transfer agreements, and business expense records.
What if my benefits are already being withheld?
If you are subject to the Social Security earnings limit, do not wait for the Social Security Administration to cut off your benefit. Instead, I’d recommend that you voluntarily suspend benefits. If you wait for the Social Security Adminstration to discover that you’ve earned too much working while on Social Security, your risk of an overpayment notice is higher.
In any case, if your benefits are withheld because you are earned more than the Social Security income limits, don’t worry…you aren’t missing payments that you’ll never get back. Your benefit amount will be recalculated at your full retirement age (or when you stop working) to reflect the months that benefits were withheld.
The best way to avoid the earnings limitation is to wait until full retirement age to file for benefits. If you can’t wait, make sure you have a clear understanding of how working impacts your Social Security benefits.
A final note
First, thanks for being a loyal reader! The blog continues to grow and it is very exciting. I appreciate your support!
As more people discover Social Security Intelligence, I receive more emails from readers with questions. For a while, I tried to answer every email, because it is so important that people have accurate answers to their Social Security questions. Unfortunately, I couldn’t keep up. However, I still think it’s important for you to get good answers to your Social Security questions. For that reason, I built a Q&A page on this website. Now, your question and my answer will benefit others who may have the same question!
If you have a question, please visit Questions & Answers to post it!
Thanks for reading!