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What Income Might Reduce Your Social Security Benefits?

Small figurines of an elderly couple standing on a stack of coins.

People are working later in life than ever before. Many people continue to work even after starting their Social Security retirement benefits. Some of these people work a part-time job for a little extra income, while others work a full-time job because they need the money to survive. However, you may already know that if you work while receiving Social Security benefits, it can reduce your monthly benefit amount. Not all income is earned through employment, so what about other types of income? Will that income also have an impact on your Social Security benefit? We will tell you everything you need to know about which types of income might reduce your Social Security benefits.

 

How Working Affects Your Social Security Income

There are several reasons someone might continue working after starting their Social Security benefits. You might decide to continue working simply because you enjoy your job or career. Some people continue working because they need money. Whatever the reason, working after you start receiving Social Security benefits could cause your benefit payments to decrease. Here is how work affects your benefits:

If you haven’t reached your full retirement age yet, working can make a big difference in how much you get each month from the Social Security Administration (SSA). If you make more than the Social Security limit, your monthly payment will go down by $1 for every $2 you make over the limit. Suppose you earn $12,000 more than the limit. This means that your Social Security benefits would be decreased by $6,000 for the year.

Things change a little during the year you reach full retirement age. In the months before your birthday during the year you reach full retirement age, your benefits will be reduced by $1 for every $3 you earn above the limit. The earnings limit also increases during that year as well. We will discuss the earnings limit in more detail in the next section. Once you reach full retirement age (FRA), there is no income limit. You can then earn any amount of money without any effect on your benefit payments.

You should pay particular attention to how much money you earn during the year, so you do not end up in an overpayment situation. This can be especially troubling for people who earn self-employment income. You might not know you’ve made more than the limit until the end of the year. At that point, the Social Security Administration will ask you to pay back any extra benefits they’ve given you. This might not seem fair, but it’s how Social Security works.

 

The Earnings Test & Social Security Income Limit

The Social Security earnings test is typically applied on an annual basis. There are some situations that allow Social Security to use a monthly earnings test, but this usually only applies during a person’s first year of retirement. Using this method, they will examine your monthly income instead of your annual income. This method typically works in favor of the Social Security beneficiary.

So, how much can you earn while collecting Social Security? If you have not yet reached full retirement age, the earnings limit for 2022 is $19,560. For 2023, this will increase to $21,240. Your benefits will be reduced by $1 for every $2 you earn above the limit. Since you pay Social Security taxes on your earnings, the Social Security Administration typically does a good job of tracking how much you have earned during the year. Once you hit the annual earnings limit, your benefits will be reduced accordingly.

In the calendar year in which you reach full retirement age, the income limit increases to $51,960. This increases to $56,520 in 2023. This limit applies to the months before your birthday. For example, if you reach full retirement age in August, then your earnings limit for January through July will be $51,960. If you hit the limit during that timeframe, your benefits will be reduced by $1 for every $3 you earn above the limit. Once you reach full retirement age, the limit goes away. There is then no limit to how much annual income you can earn, and there will be no effect on your benefits. Remember that these limits apply to both retirement benefits and survivor benefits. If your spouse keeps working while you receive spousal benefits, your benefit amount could go down.

Remember that these limits apply to Social Security retirement benefits. The rules concerning working while receiving disability benefits are much different. By definition, if you are eligible for disability benefits (SSDI), you are unable to work. Therefore, working while receiving disability benefits will most likely  cause your benefit payments to stop.

 

Social Security Earned Income Limits for 2022 & 2023

On small screens, this table is best viewed in widescreen.

 

What Income Counts Toward The Social Security Earnings Limit?

A worker in a warehouse moving boxes.

You might receive income from many different sources. Some common sources include income from a job, self-employment income, interest income, and income from retirement accounts, like an IRA or pension. So, what income counts toward the Social Security earnings limit? Generally, only earned income counts toward the limit. This includes wages from employment or net earnings from self-employment. The Social Security Administration does include bonuses, commissions, and vacation pay in these calculations.

There are many types of income that do not count toward the earnings limit. Income from most retirement plans, like distributions from an IRA or 401k, does not count toward the limit. Similarly, income from capital gains, pensions, investment income, interest income, veterans’ benefits, and military retirement benefits does not count toward the limit. You can earn an unlimited income from these sources without any effect on your Social Security benefits. Even though income from these sources might not count toward the Social Security limit, the IRS does count most of this income as taxable for income tax purposes.

When it comes to Supplemental Security Income (SSI) benefits, the rules are a little different. You must remember that SSI benefits are only for those with limited income and resources. For the purposes of SSI, the Social Security Administration will count almost all income sources. So, if you are receiving a significant income from a retirement account, you will likely not be eligible for SSI payments.

 

How Your Retirement Age Affects The Earnings Limit

We have mentioned a few times already that the earnings limit changes the year in which you reach full retirement age. This is unlike the Social Security tax limit, which is always the same regardless of your age. So, let’s discuss how that works. Full retirement age is 66 or 67 for most people, but it depends on the year you were born. Here is a chart showing your full retirement age based on your birth year.

  • Full retirement age is 66 for those born between 1943 and 1954.
  • The age is 66 and 2 months for those born in 1955.
  • The age is 66 and 4 months for those born in 1956.
  • It’s 66 and 6 months for those born in 1957.
  • Full retirement age is 66 and 8 months for those born in 1958.
  • The age is 66 and 10 months for those born in 1959.
  • The full retirement age is 67 for those born in 1960 or later.

Some changes to Social Security are being discussed, including raising the full retirement age. However, no changes are official yet, and these are the ages that are used today.

If you haven’t reached full retirement age yet, working can change your benefits in a big way. For every $2 you earn above the earnings limit, your benefits will be reduced by $1. As you near full retirement age, you are allowed to earn more money without it affecting your benefits. Beginning in the year that you reach full retirement age, the earnings limit increases drastically. In addition, your benefits will decrease less if you go over the limit. During that year, your benefits will decrease by $1 for every $3 you earn above the limit.

Once you reach full retirement age, you no longer have to worry about the earnings limit! There is no limit to how much you can earn, and the earnings can come from any source. Your earnings will no longer have any impact on your Social Security benefits. You will receive your full benefits regardless of how much other income you might earn.

 

Consider The Timing Of Your Income

A man on the phone with the SSA to inform them of his earnings while on social security.

Generally, the timing of your income is pretty straightforward. You work at a job and get paid within a week or so. There is not much confusion that arises in that basic situation. However, there are other situations that could create some confusion. For example, imagine that you earn money before you become eligible for benefits, but you don’t actually receive the money until after you have filed for Social Security. Does that income count toward the limit or not?

Social Security has some rules about the timing of your income, and the rules differ depending on whether the income was earned as an employee or as a self-employed individual. For employees, the Social Security Administration says that income counts when it is earned and not when it is received. So, in the situation above, those earnings would not count toward the limit because the income would be counted when you earned it.

On the other hand, the Social Security Administration says that self-employment income is counted when it is received instead of when it is earned. There is an exception to this rule, though. The rule states that the income counts when it is received “unless paid in a year after you become entitled to Social Security and you earned it before you became entitled.” So, what does this mean for you?

Consider this self-employment example. Suppose you earn money through self-employment in December. You start your Social Security benefits in January, and then you receive payment in February for the work you did in December. Normally, that payment would count as income in February. However, since you are now entitled to Social Security and the work was performed before you became entitled to benefits, the income would not count against you. In this case, Social Security would consider that money as income in December.

 

When You Need To Notify The Social Security Administration Of Additional Income

So, when should retirees notify the Social Security Administration that they will have additional earned income? A good rule of thumb is to always notify the Social Security Administration if you are working while receiving benefits. If you have already reached full retirement age, then you do not need to worry about notifying them. But if you have not yet reached full retirement age, you should let them know that you are earning income that could count toward the earnings limit.

You need to tell the SSA so that they can adjust your benefits correctly if they need to. Failure to notify the Social Security Administration of your income could lead to an overpayment. In that case, they will demand repayment of the overpayment, and you might only have 30 days to repay the money. You could find yourself stuck in a bad spot if you allow them to overpay your benefits, and then you need to quickly repay the overage. It’s always best to notify the SSA  upfront so that your benefits can be decreased once you hit the earnings limit. This is especially crucial when you have self-employment income, otherwise, they will not know about this income until you file your taxes. This could lead to you owing a big check to the Social Security Administration when tax season rolls around.

 

The Bottom Line

Working after you start receiving Social Security benefits can have an impact on your benefit payments. But what income counts toward the Social Security earnings limit? Generally, only earned income counts toward the limit. This includes wages from a job and self-employment income. Other income sources, like capital gains, interest income, and income from retirement accounts, do not count toward the limit. Once you reach full retirement age, the limit goes away. You can then earn an unlimited amount of income without any impact on your monthly benefit payment.

 

Frequently Asked Questions

 

What is not considered earned income for Social Security?

There are many types of income that are not considered earned income for Social Security, and these income sources will not count toward the earnings limit. Interest income, capital gains, pensions, and other types of income that don’t come from working are some examples. You can receive unlimited income from these sources without any impact on your Social Security benefits.

 

What is considered earned income for Social Security purposes?

Earned income for Social Security purposes is income that you earn by working at a job or through self-employment. This includes wages, bonuses, commissions, and vacation pay. For self-employment, it includes net income, not gross income. Earned income counts toward the maximum amount you can make and still get Social Security. If you make more than the maximum amount, your monthly Social Security payments could be cut. Do pensions count as earned income? The answer is no, and neither do capital gains, interest income, IRAs, or other distributions.

 

What type of income reduces Social Security benefits?

Earned income can reduce your Social Security benefits. Unearned income, like interest income, capital gains, IRA distributions, and others, will not reduce your Social Security benefits. Remember that earned income will only reduce your benefits before you reach full retirement age. Once you hit full retirement age, you can earn an unlimited income from any source. The Social Security earnings limit will no longer apply.

 

What types of income do not count under the earnings test?

Unearned income does not count under the earnings test. Unearned income includes income like pensions, distributions from retirement accounts, interest, capital gains, and other income that is not earned by working at a job. The two main types of income that count toward the earnings limit are wages from employment and net profit from self-employment.

 

What is the Social Security earnings limit?

The Social Security earnings limit is based on your age. Before you reach full retirement age, the maximum earnings for Social Security are $19,560. For 2023, this will increase to $21,240. In the year in which you reach full retirement age, the earnings limit is increased to $51,960. This increases to $56,520 in 2023. Once you reach full retirement age, the limit goes away. At that time, you can earn an unlimited amount of income from any source without impacting your benefits.

Elliot Marks

Elliot Marks

Elliot has spent years providing clear and concise information to help navigate the complex nuances of social security and many other government services in the United States. Elliot has a passion for helping those in need of these services to be able to find timely access to news and information that is relevant and helpful to their daily lives.