Before you reach full retirement age, there is a limit to how much you can earn at a job without losing some Social Security benefits. Plus, earnings from a job -- or any other income -- can push your adjusted gross income high enough that your otherwise tax-free Social Security benefits could be taxed. But benefits you lose from working aren't lost forever; you'll start getting them back when you reach full retirement age.
Taking Benefits Early
If you receive Social Security benefits and are under your full retirement age for the entire year -- for people born between 1943 and 1954, that age is 66 -- your benefits will be lowered if the amount you earn from a job exceeds the Social Security Administration's annual limit. For 2010, the limit is $14,160. You will lose $1 in benefits for every $2 you are paid above $14,160.
Social Security only counts wages from a job -- or your net profit if you're self-employed -- against your annual limit. Bonuses, commissions and vacation pay -- anything that would be included on a W-2 statement -- also count. Any earnings from investments or bank accounts or payments from pension plans or annuities are not counted as earnings against your annual limit.
If you earn more than the annual limit, Social Security will withhold the required amount as soon as possible. Let's assume you are 63 and you had started receiving a monthly benefit of $1,000 when you hit 62. Social Security asks you for an earnings estimate, specifically if you expect to be paid more than $1,180 in any month or more than $14,160 for the year. If you earn $6,000 more than the annual limit, your benefits will be reduced $3,000 for the year. That means your entire $1,000 benefit will be withheld in January, February and March, then you will receive your full benefit starting in April. To have the benefit reduction pro-rated throughout the year, you must make a written appeal showing financial hardship to your local Social Security office.
Overpayment Of Benefits
Although you will be asked for an earnings estimate, the IRS will let the Social Security Administration know how much you actually earned. If you earned less than your estimate, Social Security will reimburse the missing benefits. But if you under-estimate -- or simply don't notify the SSA that you will have over-the-limit earnings -- you will be notified that you must refund the overpayment in a lump sum or future benefits will be reduced.
Full Retirement-Age Year
In the year when you reach your full retirement age, there is a different formula and a different annual limit. It's a $1 reduction for every $3 you earn, and the annual limit goes up to $37,680 for 2010. Plus, only the earnings you receive before the month you reach full retirement age are counted. This provision is designed primarily to cover individuals who work until they reach full retirement age. However, it also will benefit you if you have a birthday near the end of the year. You'll be able to collect your full Social Security benefit until your earnings exceed $37,680. If your birthday is in September, for example, you could earn about $4,700 a month through August without affecting your Social Security benefits.
Regaining Lost Benefits
While you work and receive benefits, the Social Security Administration checks your record every year to see if your additional earnings increase your monthly benefit. In addition, after you reach full retirement age, the SSA will recalculate your monthly benefits to give you credit for months in which you did not receive a full benefit. For example, if you were docked $3,000 from an annual benefit of $12,000, which is the equivalent of three months of benefits, after you reach full retirement age, your benefit will be recalculated as if you started receiving benefits at 62 years, 3 months. If you lost $3,000 in benefits for every year between your 62nd and 66th birthdays, you would be credited with a full year. That would raise your monthly benefit permanently from $1,000 a month to $1,067. If you live until you're 81, you'll get back all the benefits you lost.
Taxes on Benefits
Earnings at any age might push your income high enough that some of your Social Security benefits will be taxed, according to the IRS. The quick test to see if your benefits will be taxed: Half your Social Security plus your adjusted gross income plus all nontaxable interest or dividends. If you're an individual and the total is between $25,000 and $34,000, up to 50 percent of your benefits may be taxable. If the total is greater than $34,000, up to 85 percent of your benefits may be subject to taxes. For a joint return, the numbers are $32,000 and $44,000, respectively. If you want to fill out a detailed worksheet that will provide more specific tax information, you can find one in IRS Publication 915. One way to lessen the tax bite is through judicious use of Roth IRA withdrawals. Roth distributions are not included as income in the Social Security tax formula.
- Social Security Administration: Taxes and Your Social Security Benefits
- Social Security Administration: You Can Work and Get Social Security at the Same Time
- IRS: Publication 10069, How Work Affects Your Benefits
- Social Security Administration: Early or Late Retirement
- Social Security Benefits Handbook: How Earnings Are Charged Against Monthly Benefits
Dale Bye has spent more than 40 years in journalism, including 25 supervising reporters and editors at metropolitan newspapers and eight years as senior managing editor at a national sports magazine. He directed five newspaper-sponsored personal finance fairs. His fields of expertise include business and personal finance, sports, fitness and theater. Bye holds a Bachelor of Journalism from the University of Missouri.