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Understanding Social Security may be something we all aspire to but few of us spend the time needed to navigate this complicated program.  Even if you’ve learned the basics, Social Security is adding to their regulations all the time.  However, this is an important part of your retirement income, so it’s important to understand.

The Social Security earnings test is the calculation that the agency uses to determine the limit on the money individuals who have not yet reached full retirement age (FRA) can earn, while they are collecting Social Security retirement benefits.

For 2018, for every $2 that a worker who has not yet reached FRA earns over the annual threshold limit of $17,040, Social Security will withhold $1 from your benefits.

The Social Security benefit threshold rises significantly (to $45,360 in 2018) in the year you attain your full retirement age (FRA). At that point, one dollar will be withheld for every three dollars you earn over that threshold. The earnings limit is effective the first of the year and indexed annually.

Everyone getting Social Security benefits prior to their full retirement age is subject to the earnings test—even widows and widowers receiving survivor benefits and minor children receiving benefits on a deceased parent’s record if the child earns more than the annual limit. If a minor child is receiving benefits based on a parent’s work history and the parent is still living and under full retirement age, the earnings test for the child’s benefit will be subject to the amount earned by the parent.

Let’s look at how the earnings limit is applied. In the first year, you claim Social Security prior to your full retirement age, you’re subject to a monthly earnings test beginning the month you start receiving benefits ($17,040 ÷ 12, or $1,420 per month in 2018). As a result, you can earn as much as you want prior to the month you start your benefits.

In subsequent years, until the year you reach FRA, you’re subject to an annual earnings limit each year after the first year until the year you reach your full retirement age. At the start of each year, you’ll be asked to estimate how much you plan to earn. If your estimated earnings are less than the annual limit for that year, there won’t be any Social Security benefits withheld.

The earnings limit in the year when you reach your full retirement age is much higher ($45,360 in 2018). This is a monthly earnings limit ($45,360 ÷ 12 or $3,780 per month) if it’s the first year you are claiming benefits, but an annual earnings limit if it’s the second or subsequent year you’re not receiving benefits.

The annual gross earnings, as reported on your W-2, are used. Therefore, contributing to a 401(k) or similar retirement plan to reduce earnings subject to state and federal income taxes won’t impact your earnings for the earnings test. However, payments received “on account of retirement,” like a severance package, aren’t subject to the earnings test.

Remember that the earnings of your spouse may be considered when applying the earnings test for your benefits. If you’re claiming benefits based on your current spouse’s work record, and your spouse is under FRA and continues to work, his or her earnings are considered when applying the earnings test for your benefits (even if you’ve already attained FRA). However, if you’re claiming benefits on an ex-spouse’s record, only your current earnings and age are used when applying the earnings test.

Self-employed people have to work fewer than 45 hours per month in their business, otherwise benefits claimed prior to FRA will be withheld, no matter how much they earn.

When the Social Security Administration (SSA) determines you have or will exceed the earnings test based on the estimated earnings you give them, they’ll calculate the amount to withhold and begin doing so immediately. They’ll withhold payment of full benefit checks until they receive the full amount overpaid, then they’ll go back to remitting your monthly benefit.

Depending on how much you will earn, it does sometimes make sense to apply for Social Security before your FRA, even if you might be subjected to the earnings test. For instance, a widow or widower with one income who needs the additional income might file for benefits earlier than they had anticipated. You’ll want to understand all of your options, before making the decision to file.

ReferenceInvestopedia (September 18, 2018) “How the Social Security Earnings Test Works”

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