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Earnings Limits
Filing for Social Security can be complex, especially when it comes to understanding how your earnings might impact your benefits. Whether you're approaching Full Retirement Age (FRA) or filing in earlier years, it's crucial to know the rules that apply to your situation.
The earnings test applies only to beneficiaries below full retirement age (FRA) who are collecting Social Security benefits and have earned income. Under these circumstances, the SSA will withhold benefits if the earnings exceed a certain level, called the earnings test exempt amounts. Note that this applies not just for people collecting retirement benefits, but also spousal, survivor, divorced, spousal child-incare, and even children’s benefits.
Two different exempt amounts are used. First, a lower amount is used in the years prior to the year a person reaches FRA. During these years, the SSA will withhold $1 for every $2 they earn over the lower exempt amount. For 2024, this lower exempt amount is $22,320/year, or $1,860/month.
A higher amount is used during the year that they will reach FRA. During this year, a person will have $1 withheld for every $3 they earn over the higher exempt amount. For 2024 this higher exempt amount is $59,520/year or $4,960/month. In the month in which a person turns FRA, and all years after, the earnings test no longer applies.
The actual procedure that the SSA uses to withhold benefits takes place in the year following the one in which earnings occurred. When the SSA has received an employer’s wage records for employees, usually in the first month of the new year, benefits paid to those employees collecting Social Security will be reduced to account for their earnings that exceeded the exempt amounts.
Like other Social Security calculation numbers, the SSA determines the exempt amounts using procedures defined in the Social Security Act and the amounts generally increase annually with increases in the National Average Wage Index.
Let’s look at some examples of this rule.
First, consider a person who is collecting benefits and is not yet in the year they turn their FRA. They will earn $32,320 in 2024. This is $10,000 above the lower exempt amount of $22,320 for the earnings test, therefore $1 for every $2 earned above this amount, or $5,000, will be withheld from their Social Security benefits based on reported earned income during 2024.
Now consider a person who will be turning FRA in 2024 and will earn $74,520 the months prior to their FRA month. This is $15,000 above the higher exempt amount of $59,520 for the earnings test, therefore $1 for every $3 earned above this amount, or $5,000, will be withheld from their Social Security benefits based on 2024 reported earnings.
Related to the above examples, is a Social Security special earnings limit rule called the Monthly Earnings Test (MET) which applies to earnings in the first year of collecting benefits, because benefits are only collected for a part of the year. This is occurs most commonly in the first year of collecting retirement benefits called the Initial Grace Year. The MET also applies in subsequent years following a break in entitlement or if your earnings fall below the limit in any month. The MET also applies for the first year someone collects a dependent benefit which is called the Termination Grace Year.
The limit is prorated for only the months of the year when collecting benefits. However, this limit is strict. Even $1 over the monthly limit causes the entire benefit amount for that month to be withheld.
The special rule allows Social Security to pay a retiree’s full benefit for any whole month considered retired, regardless of the yearly earnings. Those who are under FRA for all of 2024, are considered retired in any month that their earnings are $1,860 ($22,320/12) or less. For those who reach FRA in 2024, they are considered retired in any month that their earnings are $4,960 ($59,520/12) or less.
In addition to the monthly earnings limit, workers may not have performed substantial services in self-employment. This means devoting more than 45 hours a month to the business or between 15 and 45 hours to a business in a highly skilled occupation.
Example: consider Alex who retires and collects his benefit at age 62 on June 30, 2024. He earned $37,000 before he retired. On October 5th, Alex starts his own business. He works at least 15 hours a week (60 hours per month) for the rest of the year and earns an additional $3,000 after expenses. His total earnings for 2024 are $40,000.
Although his earnings for the year substantially exceed the 2024 lower annual limit ($22,320), Alex receives a Social Security payment for July, August, and September. This is because he was not self-employed and his earnings in those three months were $1,860 or less per month, the limit for younger people who do not reach full retirement age this year.
Alex lets the SSA know of his work, and thus does not receive benefits for October, November, or December 2024 because he worked in his business over 45 hours per month in all three months. Beginning in 2025, the deductions will be based solely on Alex’s annual earnings limit for the years until he reaches FRA.
It is important to note that any benefits withheld while a person continues to earn income are not "lost.” Upon reaching FRA, the monthly benefit will be recalculated and increased permanently to account for the months in which benefits were withheld. This allows a person to capture those “lost” benefits if withheld from a retirement, spousal, or survivor benefit. (Spouses and survivors who receive benefits because they have qualified children will not have their benefits recalculated). Let’s see how this is done, in Tim’s case below.
Example: Tim has a monthly benefit of $1,000. He filed for his Social Security retirement benefit at age 65 in January of 2024. This means he will receive 86.66% of his PIA (PIA = $1,154). He has earnings of $50,000 this year and told the SSA in his application. He will have no future earnings after the end of 2024.
Tim is below his FRA so as explained above $1 for every $2 over the lower exempt limit of $22,320 is withheld. In this case, the earnings test would reduce his benefits by $13,840. This is greater than his annual benefits would be, so no benefits are paid, and nothing is owed.
How does this recalculate at FRA?
- The amount of benefit withheld is a certain percentage of the full benefit amount. First, find that amount.
- In this case, 100% of benefits were withheld.
- Determine the percentage of delayed retirement credits this is equivalent to.
- In this case, filing at 65 vs 66 is a 6.67% increase of benefits from the delayed retirement credits. Reference Figure 2.3.
- From the above two percentages, find the amount the PIA will increase.
- He will get 100% of the 6.67% calculated back into his benefit at FRA. Thus, at FRA instead of receiving 86.66% of his PIA, he will start receiving 93.33%, $1,077.
In this example, because the entire amount that year was eliminated by the earnings test, it’s as if he had delayed benefits during that time. If only half of the benefit was withheld due to earnings for Tim, benefits would be recalculated as 50% of 6.67%, which would result in a benefit of 90% of his PIA once he reaches FRA. This example is valuable to understand at a conceptual level, but you do not need to remember the exact calculation.
As we’ve seen, many people begin collecting Social Security at the earliest age possible, 62, perhaps after retiring from a lifetime of full-time work. Many may realize several months or years later that they want to work part-time or perhaps find a new career they enjoy.
The earnings test exempt amount during the years prior to turning FRA is quite low and earnings may easily surpass this limit. Again, it is important for all retirees to understand the rules that may apply to them prior to making their election decision.
By carefully planning the timing of your Social Security filing and understanding the earnings limits, you can ensure that you maximize our benefits without unexpected penalties. If you're in a similar situation,consider your earnings and filing date to make the most informed decision.
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Additional References
https://www.narssa.org/members/program/1/download/
NH 091924