Many federal retirees and annuitants retired from federal service recently and some of these annuitants are now pursuing new careers, perhaps working for employers in private industry.
Those annuitants covered by the Federal Employees Retirement System (FERS) and 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 individuals between age 62 and their full retirement age (FRA) who are receiving their Social Security retirement benefits and who also have “earned income”.
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) and the Medicare Part A (hospital insurance) 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 in the month a Social Security recipient reaches his or her FRA. Upon reaching the FRA month, a Social Security recipient can have as much as earned income and not lose any of his or her Social Security benefits he or she is receiving.
What Are The Social Security Earnings Tests During 2020?
Those Social Security retirement benefit recipients who are younger than FRA during 2020 – in particular, those recipients between the ages of 62 and 65 – can earn (have earned income) up to $18,240 during 2020 ($1,520 monthly) without losing any of their monthly Social Security retirement benefits. If one’s earned income exceeds $18,240 during 2020, the Social Security Administration (SSA) will withhold one dollar of benefits for every two dollars of earned income above $18,240. 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 an individual becomes FRA. During 2020, individuals born anytime during 1954 become FRA (age 66). If the individual is receiving a Social Security retirement benefit and also has earned income, then for every three dollars the individual earns above $48,600 prior to the month the individual becomes age 66, the SSA will withhold one dollar of benefits.
The higher wage exempt amount ($48,600 during 2020) applies if an individual reaches FRA on or before the last day of the calendar year – December 31. The lower exempt amount ($18,240 during 2020) 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 May 31, 2020. The lower exempt amount in effect for 2019 ($17,640) applied for calendar year 2019 and the higher exempt amount ($48,600) applies for the months of January through April 2020. For Wes, a Social Security earnings test no longer applies starting in the month of May 2020.
Monthly Earnings Test Applies in the First Year Benefits are 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 illustrates:
Example 1. Cliff retired from federal service at age 64 on June 29, 2019 and elected to start receiving his (reduced) Social Security monthly retirement benefit at $1,500 per month. From January 1 through June 28, 2019, Cliff earned a total of $18,000. Cliff had earned income of $1,200 per month for the period from July 1 through December 31, 2019, for a total of $7,200. If an annual earnings test were applied, then Cliff would have lost [($18,000 plus $7,200) less $17,640]/2 or $3,780 of benefits. However, since 2019 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 $1,470 ($17,640/12) per month, or is not substantially self-employed. Therefore, since Cliff earned $1,200 per month starting July 1, 2019 and through Dec. 31, 2019, Cliff has no reduction in his 2019 Social Security monthly retirement benefit for 2019.
Example 2. Marilyn reached FRA of age 66 in July 2019. Marilyn worked throughout 2019 and earned a total of $72,000 throughout 2019, or $72,000/12 or $6,000 per month. Since Marilyn became FRA in July 2019, her earnings limit was $46,920 before the month Marilyn becomes FRA in July 2019. Also, because 2019 was 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 $46,920/12, or $3,910 per month, Marilyn keeps her monthly Social Security retirement benefit. But Marilyn earned $6,000 per month from Jan. 1 through June 30, 2019. If she received her Social Security benefit of $2,200 per month starting in January 2019, then each month Marilyn’s Social Security benefit would have been reduced by $6,000 – $3,910/3, or $697. Starting in July 2019, when Marilyn becomes FRA, she will receive her full Social Security retirement monthly benefit of $2,200.
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) (https://www.ssa.gov/forms/ssa-820.pdf) and SSA Form SSA-821-BK (Work Activity Report) (https://www.ssa.gov/forms/ssa-821.pdf) 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 focuses on 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:
Catherine retired from federal service at age 62 on Dec. 31, 2018 and started receiving her Social Security retirement benefits in January 2019. Catherine received a check for $20,500 in January 2019 for her unused annual leave hours at the time of her retirement. Since Catherine’s annual leave hours were earned before she retired in Dec. 31, 2018, the SSA will consider the lump sum payment for unused leave as a special payment. SSA will therefore not include the lump sum payment as part of Catherine’s earnings limit of $17,640 during 2019.
Federal retirees who are between age 62 and FRA and who retired from federal service in late 2019, or who will be retiring sometime during 2020, should be aware of the “special payment” rules. If these employees want to be assured that their lump-sum payment for unused annual leave and their last paychecks earned before they retired are not included as part of the “earnings” test for 2020, they should download Form SSA-131 (Employer Report of Special Wage Payments) (https://www.ssa.gov/forms/ssa-131.pdf) 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. The last paycheck and lump-sum payment for unused annual leave will then not be counted as earnings included in the 2020 earnings test.