How Does the Social Security Earnings Test Work?

If you:

  1. Are younger than full retirement age,
  2. Have filed for a Social Security benefit of some kind, and
  3. Are working…

…then the Social Security earnings test could result in some or all of your benefit being withheld. It could also result in withholding of benefits that anybody else is receiving on your work record (e.g., your spouse’s benefit as your spouse).

Specifically, the Social Security earnings test says that, in any year for which you will be younger than full retirement age throughout the entire year, for every two dollars you make in excess of a certain threshold ($18,240 for 2020), one dollar of your Social Security benefit (or somebody else’s benefit on your work record) will be withheld.

Example: In 2020, Bob is 63 years old and has already filed for his retirement benefit. He earns $40,000 over the course of the year. As a result, the earnings test will cause $10,880 of his benefits to be withheld in 2020. (That is, the excess of $40,000 over $18,240, divided by two.)

Earnings Test in Year of Full Retirement Age

In the year in which you reach your full retirement age, the earnings test works somewhat differently. Specifically:

  • The threshold is higher. (Again, you can find it here.) For 2020, it’s $48,600.
  • Only your earnings prior to the month in which you reach full retirement age will count toward the test.
  • One dollar of benefits is withheld for every three dollars of excess earnings rather than every two dollars of excess earnings.

Example: Jane filed for her retirement benefit in a prior year. Jane reaches her full retirement age in August of 2020. She earns $8,000 each month throughout the year. Because she reaches her full retirement age in August, it is only her earnings from January-July that will count toward the earnings test. So that’s $8,000 x 7 = $56,000. Given the 2020 threshold of $48,600, she has $7,400 of excess earnings. We then divide $7,400 by three, and we see that the earnings test will cause $2,466 of Jane’s retirement benefit to be withheld in 2020.

Earnings Test After Full Retirement Age

In years after the year in which you reach your full retirement age, your earnings will not result in the earnings test withholding any benefits. (However, as we’ll discuss below, if you are receiving a benefit as a spouse, and your spouse is younger than full retirement age, his/her earnings could cause your spousal benefit to be withheld — even if you are older than full retirement age.)

What Counts as Earnings?

Wages, salary, commissions, tips, net earnings from self-employment, and a few other less common forms of income count as earnings for the earnings test. (You can find the full list here.)

Interest, dividends, capital gains, IRA/401(k) distributions, rental income, pensions, and several other types of income do not count as earnings for the earnings test. (You can find the full list here.)

How Does the Actual Withholding Work?

When you file for a Social Security benefit, the SSA will ask you to estimate your earnings for that year. Your earnings test withholding will be based on that estimated amount. Then, once the year is over and your actual earnings amount is known, you settle up with the SSA. (That is, if too little was withheld, you will be required to pay the additional amount that should have been withheld. Conversely, if too much was withheld, the overwitheld amount will be paid back to you.)

Another key point is that the withholding from the earnings test is not applied evenly (pro-rata) throughout the year. Instead, your monthly Social Security benefit is completely withheld until the necessary amount of annual withholding has occurred.

Example: Mary is 64 years old, and she filed for her retirement benefit last year at age 63. Her monthly retirement benefit (prior to considering any withholding) is $1,500. If her earnings for the year are such that $6,000 needs to be withheld, her benefit will be completely withheld from January-April. Then she would receive her normal $1,500 for each month from May-December.

If Mary’s earnings were slightly higher and the earnings test said that $6,300 needed to be withheld, then her benefit would be completely withheld from January-May (resulting in $7,500 being withheld). Then, at the beginning of the following year, she would receive back the $1,200 of overwithholding.

How Does the Earnings Test Affect Spousal (and Child) Benefits?

As a result of your earnings, the earnings test can result in the withholding of:

  • Any benefit you are receiving, and
  • Any benefit that somebody else is receiving on your work record (regardless of their age).

Example: Lynn and John are married. They have each filed for their own retirement benefits. In addition, because Lynn’s earnings history is considerably higher than John’s, John has filed for his benefit as Lynn’s spouse.

If Lynn is younger than full retirement age, her earnings could result in her retirement benefit and John’s benefit as her spouse being withheld (even if John has reached his FRA). Lynn’s earnings cannot, however, result in John’s own retirement benefit being withheld.

If John is younger than full retirement age, his earnings could result in his retirement benefit and his benefit as Lynn’s spouse being withheld. His earnings cannot, however, result in Lynn’s retirement benefit being withheld.

To reiterate, if you are younger than FRA, your own earnings can cause any benefit that you are receiving (e.g., retirement, spousal, survivor) to be withheld. And, if you are younger than FRA, your own earnings can result in somebody else’s benefit as your spouse (or child) being withheld (even if that person has reached their FRA). But your own earnings cannot result in anybody else’s own retirement benefit being withheld.

Do You Get the Withheld Benefits Back at Some Point?

On the SSA website, you will find the following statement:

“It is important to note that any benefits withheld while you continue to work are not ‘lost’. Once you reach [full retirement age], your monthly benefit will be increased permanently to account for the months in which benefits were withheld.”

Many people misinterpret this to mean that they will receive a lump sum when they reach FRA, to repay any benefits that had been withheld. To be clear, that is not what happens.

Instead, when you reach FRA, your benefit is recalculated, and any reduction that had previously been applied due to having filed early will now be reduced (yes, the reduction is reduced) based on how many months of benefits were withheld.

Example: You originally filed for your retirement benefit 30 months prior to your full retirement age, but the earnings test resulted in your benefit being withheld for 13 months. Effective as of your FRA, your benefit will be recalculated as if you had only filed 17 months early rather than 30 months early.

The “Grace Year” Rule

According to the “grace year” rule, the earnings test will not result in withholding of benefits for any non-service months in a grace year.

A non-service month is a month in which you earn less than 1/12 of the normal earnings test annual threshold amount (so, $1,520 for 2020) or in which you do not perform “substantial services” for your business if you are self-employed.

And your grace year is the first year in which you have a non-service month after having filed for a retirement/spousal/survivor benefit.

Example: Monica retires in June of 2020 at age 64, and she files for her retirement benefit to begin in the following month (July). By the time of her retirement, she had already earned $70,000 for the year. If Monica earns less than $1,520 in each of the following months (i.e., July-December), the earnings test will not cause any of her benefits to be withheld, even though she earned far beyond the annual threshold amount for the year.

A key point about the grace year rule, however, is that it does not prevent withholding of somebody else’s benefit on your work record.

For example, in the example above, if Monica were married and her husband were receiving a spousal benefit on Monica’s work record, her husband’s spousal benefit could still be withheld July-December due to Monica’s annual excess earnings, despite those months being non-service months in Monica’s “grace year.”

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