The Earnings Test: How Your Social Security Payments Are Calculated When You Work

By Jonathan Peterson

Copyright © 2015 AARP

Social Security has an annual earnings limit, a rule that may significantly reduce your benefit payments if you collect them in early retirement (although the withholding is made up after you reach full retirement age).

The annual earnings limit may apply only if you’re collecting Social Security benefits and haven’t yet reached full retirement age (currently 66). This rule may also hit spouses, as well as widows, widowers, and others getting survivor benefits. After you reach your full retirement age, the earnings limit vanishes.

How the earnings limit works

Here’s how the basic earnings limit works: If you get benefits and you also earn money, the SSA reduces your benefit by $1 for every $2 you earn above a certain amount. The amount typically goes up every year; it was set at $15,480 in 2014. The limit eases for the year you reach full retirement age. In that year, the SSA withholds $1 for every $3 you earn over the limit. The cap also goes up annually; in 2014, it was $41,400.

When you reach full retirement age, your earnings no longer affect your benefits. Starting with your birthday month, the income is no longer a concern.

If you’re working and getting Social Security, contact the SSA at the start of the year you reach full retirement age. Because less money is withheld from your benefit that year, it’s possible that the SSA won’t have to withhold anything.

The withholding works like this: Suppose it appears, based on the information the SSA has, that your wages for the year will exceed the earnings limit. If so, the SSA takes the money in excess of the limit by withholding entire payments until you’ve paid up. Suppose you earn enough to trigger $3,000 of withholding.

Now suppose your monthly Social Security benefit is $1,000. The SSA may hold back each of your $1,000 payments for January, February, and March to get $3,000 and meet the requirement.

You can sometimes meet the withholding requirement by spreading it over a year rather than giving up entire monthly payments (prorating). You may qualify for prorating if you don’t owe the SSA money from receiving an overpayment. If you want to prorate the withholding into June of the following year, you have to explain that it’s needed to avoid financial hardship or that it disrupts your retirement plans.

Elena, 64, plans to begin her Social Security benefits in January and qualifies for a payment of $1,500 per month, which comes to $18,000 per year. Elena’s employer values her graphic‐design skills and makes her an unexpected offer to stay — $40,000 to continue working for another year on a reduced weekly schedule. How does this affect her Social Security benefits?

If the earnings limit is $15,480, that means her $40,000 in income would put her $24,520 above the cap. The SSA withholds $1 for every $2 over the limit, which in this case comes to half of $24,520, or $12,260. After withholding, Elena’s Social Security benefit for the year would total $5,740. She’ll ultimately get back that withholding after she starts benefits at her full retirement age.

But to make matters worse, by starting her Social Security at 64, Elena’s benefit is reduced by about 7 percent — permanently — because of the normal reduction for starting benefits before full retirement age. In her case, it makes more sense to take the good offer and start Social Security benefits later.

The rule is different if you work during the year in which you reach full retirement age.

Elena is 65 now and has a birthday coming up in December. In the first 11 months of the year, she earns $18,340. Because this is the year she reaches full retirement age, a different and much higher cap applies — $41,400 in this example.

If Elena had a higher salary — say, $50,000 through November — that would put her $8,600 over the cap. The SSA withholds $1 out of $3 for that amount, which comes to about $2,867 that year. The withholding is no longer calculated starting in December, Elena’s birthday month.

How exceeding the limit may cost your family

Be aware that if you bust the earnings limit, the SSA may withhold not only your benefits but also the benefits of a dependent, in proportion to their share of the family’s total benefits.

Say Melissa gets $900 per month in Social Security retirement benefits. She’s still working at age 63 as a retail‐store manager and anticipates $2,000 in earnings above the limit. Melissa’s husband, Bryan, is collecting a spousal benefit of $450 per month. The SSA withholds money from each of them, because Bryan’s benefit is based on his wife’s earnings record.

For one month, the SSA withholds each of their payments completely — $900 from Melissa and $450 from Bryan, for a total of $1,350. But the SSA still wants to withhold another $650 to recover the full $2,000. It does so in proportion to each spouse’s share of benefits. So, the following month, the SSA withholds $433 from Melissa and $217 from Bryan to get the $650.

If a lower‐earning spouse exceeds the earnings limit, based on benefits collected through that spouse’s own work record, the SSA withholds benefits from that individual.

This information shows current exempt amounts that workers are allowed to earn while also collecting Social Security benefits. The higher amount applies to the year in which you reach full retirement age.

Year Lower Amount 1 Higher Amount 2
2000 $10,080 $17,000
2001 $10,680 $25,000
2002 $11,280 $30,000
2003 $11,520 $30,720
2004 $11,640 $31,080
2005 $12,000 $31,800
2006 $12,480 $33,240
2007 $12,960 $34,440
2008 $13,560 $36,120
2009 $14,160 $37,680
2010 $14,160 $37,680
2011 $14,160 $37,680
2012 $14,640 $38,880
2013 $15,120 $40,080
2014 $15,480 $41,400
2015 $15,720 $41,880

1 Applies in years before the year of attaining full retirement age.

2 Applies in the year of attaining full retirement age, for months prior to such attainment.

Source: Social Security Administration