How Social Security’s Earnings Test Can Affect Your Retirement Benefits

Many federal annuitants retired from federal service during 2023. Some of these annuitants are now pursuing new careers, perhaps working for employers in private industry. Annuitants covered by the Federal Employees Retirement System (FERS) who have reached their 62nd birthday are eligible to start receiving their Social Security retirement benefits. There are also some annuitants covered by the Civil Service Retirement System (CSRS) who accumulated at least 40 credits of Social Security, have reached their 62nd birthday or older and who decided to start receiving their Social Security retirement benefits.

This column discusses how the Social Security “earnings test” affects working individuals between age 62 and their full retirement age (FRA) and who are receiving their Social Security retirement benefits.

SEE ALSO:

• Quirks of Waiting Until Full Retirement Age to Claim Social Security Benefits
• Coordinating TSP Withdrawals and Receipt of Social Security Retirement Benefits

Full Retirement Age (FRA)

FRA is determined by an individual’s year of birth, as shown in the following table:

The earnings test is based on an individual’s earned income. Earned income includes salary/wages and net income/profit from self-employment that is subject to the self-employment (SE) tax. The SE tax includes both the employee and employer portion of the Social Security (FICA tax) and the Medicare Part A (hospital insurance tax) payroll taxes. Earned income does not include investment income (interest, dividends, capital gains), pension income (TSP, IRA and other pension-type income), Social Security benefits, and rental income.

The earnings test does not affect Social Security benefits beginning the month a Social Security recipient reaches his or her FRA. Upon reaching the FRA month, a Social Security recipient can have as much in earned income and not lose any of his or her Social Security benefits he or she is receiving.

The Social Security Earnings Tests During 2024

Social Security retirement benefit recipients who are younger than FRA during 2024 – in particular, those recipients between the ages of 62 and 66 years and 10 months old during 2024 – can earn up to $22,320 during 2024 ($1,860 monthly) without losing any of their monthly Social Security retirement benefits. If an individual’s earned income exceeds $22,320 during 2024, the Social Security Administration (SSA) will withhold one dollar of benefits for every two dollars of earned income above $22,320. Note that this test applies to Social Security retirement benefits; a different “earnings test” applies to Social Security disability benefits. Also, a spouse’s earned income does not affect the “earnings test” of the other spouse who also has earned income and is receiving Social Security retirement benefits.

A different earnings test applies to an individual’s Social Security retirement benefit in the year and month an individual becomes FRA. During 2024, individuals born anytime between July 1, 1957 and April 1, 1958 reaches his or her FRA. If the individual is receiving a Social Security retirement benefit and also has earned income, then for every three dollars the individual earns above $59,520 prior to the month the individual becomes age they become FRA, the SSA will withhold one dollar of benefits.

The higher wage exempt amount ($59,520 during 2024) applies if an individual reaches FRA on or before the last day of the calendar year – December 31. The lower exempt amount ($22,320 during 2024) applies if the Social Security retirement benefit applicant does not reach FRA on or before December 31, as illustrated in the following example:

Wes reaches age FRA on March 20, 2024. The lower exempt amount in effect for 2023 ($21,240) applied for calendar year 2023 and the higher exempt amount ($59,520) applies for the months of January and February 2024. For Wes, a Social Security “earnings test” no longer applies starting in the month of March 2024.

Monthly Earnings Test Applies in the First Year Benefits Received

In the individual’s first year in which Social Security retirement benefits are received, whether it is a year before the individual becomes FRA or the year the individual becomes FRA, earned income is measured on both an annual and a monthly basis. Full benefits will be paid for any month the individual earns no more than one-twelfth of the annual exempt amount. A different test applies if the individual is self-employed.

The following examples illustrate:

Example 1. Cliff retired from federal service at age 64 on June 29, 2023 and elected to start receiving his (reduced because Cliff started to receive his monthly Social Security retirement benefit before reaching his FRA) Social Security monthly retirement benefit at $1,500 per month. From January 1 through June 28, 2023, Cliff earned a total of $18,000. Cliff earned income of $1,200 per month for the period from July 1 through December 31, 2023, for a total of $7,200. If an annual earnings test were applied, then Cliff would have lost [($18,000 plus $7,200) less $21,240]/2 or $1,980 of benefits. However, since 2023 is Cliff’s first year of receiving Social Security retirement benefits, he will not lose any of his Social Security retirement benefits in which earns no more than $1,770 ($21,240/12) per month or is not self-employed. Therefore, since Cliff earned $1,200 per month starting July 1,2023 and through Dec. 31, 2023, Cliff has no reduction in his 2023 Social Security monthly retirement benefit.

Example 2. Marilyn will reach her FRA of age 66 and 8 months on September 4,2024. She was born January 4,1958. Marilyn intends to work throughout 2024 and earn a total of $72,000 throughout 2024, or $72,000/12 equals $6,000 per month. Since Marilyn became FRA in September 2024, her earnings limit is $59,520 as of the last day of the month before Marilyn reaches her FRA (August 31, 2024). Also, because 2024 is the first year Marilyn received her monthly Social Security retirement benefit, a monthly “earnings test” applies. In particular, assuming Marilyn does not earn more than $59,520/12, equals $4,960 per month, Marilyn keeps her monthly Social Security retirement benefit. But Marilyn earned $6,000 per month from Jan. 1 through Aug. 31,2024. If she received her Social Security benefit of $2,200 per month starting in January 2024, then each month Marilyn’s Social Security benefit would have been reduced by [$6,000 – $4,960]/3, or $347. From January 2024 through August 2024, Marilyn’s net monthly Social Security benefit will be $2,200 less $347 or $1,853. Starting in September 2024, when Marilyn reaches her FRA, she will receive her full Social Security retirement monthly benefit of $2,200.

Reporting Earnings

As explained above, earned income may affect the Social Security retirement benefits of those individuals who are younger than their FRA. The SSA gets information from the earnings reported on the W-2 and the self-employment earnings reported on the individual’s income tax return.

Individuals need to report their earnings to the SSA after year-end only if:

(1) They are eligible for the special monthly rule and they earned less than the monthly limit;

(2) some or all of the earnings shown on their Form W-2 were not earned in the year reported;

(3) their wages were over the limit and they also had a net loss in self-employment; or

(4) the SSA withheld some benefits but they had no earnings for the year or their earnings were less than they previously told the SSA.

SSA Form SSA-820-BK (Work Activity Report for self-employed person) and SSA Form SSA-821-BK (Work Activity Report) are used to report work activity that affects Social Security monthly retirement benefits.

Special Payments After Retirement

After an employee retires, the retired employee may receive payments for work the retired employee performed before starting to receive Social Security benefits. Usually those payments, called special payments, will not affect one’s Social Security payments. The following section discusses some of the most common types of special payments, helps a retired employee decide if he or she received special payments, and what needs to be done in the event a retired employee receives a special payment.

Special payments to employees include bonuses, accumulated vacation time (for federal employees – unused annual leave), severance pay, back pay, standby pay, or deferred compensation reported on a W-2 form for a particular year but earned in a previous year. Special payments are not counted towards the Social Security earnings test limit.

The following example illustrates how a special payment is treated under the Social Security earnings test limit:

Example 3. Catherine retired from federal service at age 62 on Dec. 31, 2022 and started receiving her Social Security retirement benefits in January 2023. Catherine received a lump sum payment of $20,500 in January 2023 for her unused annual leave hours at the time of her retirement. Since Catherine’s annual leave hours were earned before she retired on Dec. 31,2022, the SSA will consider the lump sum payment for unused annual leave hours as a special payment. SSA will therefore not include the lump sum payment as part of Catherine’s earnings limit of $21,240 during 2023.

Federal annuitants who are between age 62 and FRA and who retired from federal service in late 2023 (or who will be retiring sometime during 2024 and starting to receive monthly Social Security monthly Social Security benefits, should be aware of the special payment rules. If these employees want to be assured that their lump sum payment for unused annual leave hours (and their last paycheck earned before they retired) are not included as part of the earnings test for 2024, they should download Form SSA-131 (Employer Report of Special Wage Payments) and give the form to their Personnel or Human Resources Office of the agency they retired from. The Personnel or Human Resource Office will then submit the completed SSA-131 to the SSA on behalf of the retired employee. Their last paycheck and lump-sum payment for unused annual leave will then not be counted as earnings included in the 2024 earnings test.

A portion of Form SSA-131 is shown here: