Working While Collecting Social Security Benefits

Yes, you can collect Social Security benefits while working. However, depending on your age, there are some important caveats to keep in mind.

Your earned income could reduce the amount of your Social Security benefits if you are younger than your full retirement age (FRA); the age at which you qualify to collect 100% of your Social Security benefits. Before your FRA, the Social Security Administration does not consider you to be “fully retired” if you make more than a certain amount from working. They will reduce a portion of your Social Security benefits if your earnings exceed the annual limit. Once you reach your FRA, however, there is no adjustment to your Social Security benefits based on your earned income.

The current earnings limits are as follows:

  • In 2021, you lose $1 in Social Security benefits for every $2 of earned income over $18,960. For example, if you have a part-time job that pays $20,000 per year, your earned income is $1,040 over the limit; therefore, Social Security will deduct $520 in benefits for that year.
  • In the year you reach your full retirement age, you lose $1 in Social Security benefits for every $3 of earned income over $50,250. This applies until you reach your FRA; after that, the earnings limit doesn’t apply.

It’s important to keep in mind that the earnings limit also applies to those receiving spousal benefits, children’s benefits, and survivor benefits. Anyone receiving benefits based on your work record, such as a spouse or a child, could also be affected by these adjustments if your payments are reduced due to the limits. If your spouse has started collecting Social Security benefits early and you’re collecting spousal benefits based on their work record, then both of your benefits could be reduced due to their earnings level if it exceeds the limits. However, your spouse’s income is not counted towards the earnings limit related to your own benefits, even if you file jointly on your income tax return. Social Security does not count both spouse’s incomes against one spouse’s earnings limit – they only count what you make from working while receiving benefits.

It’s not all bad news though – benefits that you lose while working before your FRA will be recouped later. When you reach your FRA, Social Security will increase your monthly benefit to account for what was previously withheld. See the following example for clarification on how this works:

  • Suppose you turn 62 in 2021 and claim Social Security. Your monthly benefit is $1,200 and you earn $25,000 annually through a part-time job. For the year, Social Security withholds $3,020 from your payments (half of the $6,040 by which you exceeded the earnings limit). That works out to 2.5 months of benefits lost, which Social Security rounds up to 3 months.
  • Now suppose you continue to lose 3 months of benefits per year until you reach your FRA — that’s 66 years and 10 months for people like you who were born in 1959. That works out to an estimated 15 months of withheld benefits. When you hit your FRA, Social Security will reset your benefit as if you’d filed only 43 months early rather than 58 months early. (The difference is that you get 70.8% of your “full” benefit at 58 months early vs. 77.1% at 43 months early.)

The additional years worked could also increase your benefit payments if the earnings for these years are among your 35 years of highest earnings. This would increase your lifetime average for monthly income and would raise your overall benefit amount.

Social Security only considers income earned from work for the earnings test. If you’re self-employed, they would count your net income only. They do not count income from interest, capital gains, retirement account distributions, pensions, or annuities.

Social Security will automatically make the necessary adjustments based on the earnings information it receives from your W-2s and income tax returns. However, you can report your estimated income to Social Security as soon as you’re aware of your estimated income levels. Here’s how it works:

  • At the beginning of the year, you notify Social Security what you expect to earn that year, by phone at 800-772-1213, or in person at your local Social Security office. (Note that some offices may be closed due to COVID-19.) You can update the estimate at any time if your work situation changes.
  • Based on this information, Social Security stops your monthly benefit until they recover the necessary amount based on how much your income exceeds the limit.
  • At the end of the year, you notify Social Security what you’ve earned, and they revise the calculation. If it turns out they withheld too much, you’ll get a refund. If they didn’t withhold enough, you’ll have to pay the difference.

Self-reporting your estimated income early has the advantages of timeliness and relative certainty. If you wait for the Administration to receive your tax documents, Social Security receives data on your income after you’ve earned it and may not implement the benefit withholding until many months later. Waiting can often result in receiving a fairly large “bill” from the Social Security administration looking to recoup the amount of temporarily overpaid benefits. This can come as quite a shock if it’s not anticipated and there’s a chance you may not have the cash readily available to pay the bill.

Waterford Advisors, LLC’s financial planners are always available to answer any specific questions that you may have regarding your unique situation and benefits. Please feel free to contact our office at any time.