Many Americans face a critical decision when approaching retirement: whether to claim Social Security benefits early while still working. The Social Security earnings test plays a significant role in this decision, as it can temporarily reduce your monthly payments if you earn above certain thresholds before reaching full retirement age. While this might sound discouraging, the system includes mechanisms to recalculate and restore most of those withheld benefits later in your retirement years.

How Does the Social Security Earnings Test Work?

The earnings test applies only if you claim Social Security benefits before your full retirement age, which ranges from 66 to 67 depending on your birth year. If you work and earn above the annual exempt amount, the Social Security Administration will withhold a portion of your benefits. For 2024, if you’re under full retirement age for the entire year, Social Security deducts one dollar in benefits for every two dollars you earn above the annual limit of approximately $21,240. In the year you reach full retirement age, a different rule applies: one dollar is withheld for every three dollars earned above a higher threshold of around $56,520, but only for months before you reach that milestone. Once you attain full retirement age, the earnings test no longer applies, regardless of how much you earn.

What Types of Income Count Toward the Earnings Limit?

Understanding which income sources count toward the earnings test is essential for planning. The Social Security Administration considers wages from employment and net earnings from self-employment. This includes salaries, bonuses, commissions, and vacation pay. However, not all income affects your benefits. Investment income such as interest, dividends, capital gains, rental income from real estate, pension payments, and annuities do not count toward the earnings limit. Additionally, withdrawals from retirement accounts like 401(k)s or IRAs are excluded. This distinction allows retirees to supplement their income through investments and savings without triggering benefit reductions.

What Happens to Withheld Benefits?

A common misconception is that benefits withheld due to the earnings test are permanently lost. In reality, the Social Security Administration recalculates your benefit amount once you reach full retirement age to account for months when benefits were reduced or withheld. This adjustment increases your monthly payment for the remainder of your life. For example, if you claimed benefits at age 62 but had 12 months of benefits withheld due to excess earnings, Social Security will recalculate your benefit at full retirement age as if you had claimed it one year later. While you won’t receive a lump sum repayment, the higher monthly amount over your lifetime generally compensates for most or all of the withheld benefits, especially if you live into your eighties or beyond.

Should You Delay Claiming Benefits If You Plan to Keep Working?

Deciding whether to claim Social Security early while working depends on multiple factors including your health, financial needs, life expectancy, and career plans. If you expect to earn significantly above the exempt amount and need to maximize immediate cash flow, claiming early might still make sense despite temporary reductions. However, if you can afford to wait, delaying benefits until full retirement age or even age 70 results in permanently higher monthly payments without any earnings test concerns. Each year you delay claiming beyond full retirement age increases your benefit by approximately eight percent, up to age 70. Financial advisors often recommend running personalized calculations that account for your specific earnings projections, expected longevity, and other retirement income sources.

How Do You Report Earnings to Social Security?

If you’re receiving Social Security benefits and working, you must report your estimated earnings to the Social Security Administration. You can do this when you apply for benefits or update your estimate at any time through your online My Social Security account, by phone, or by visiting a local office. The SSA uses your estimate to adjust your monthly payments throughout the year, helping you avoid large overpayments that would need to be repaid later. At the end of the year, Social Security verifies your actual earnings through tax records and makes any necessary adjustments. If your actual earnings were lower than estimated, you may receive additional benefits. If they were higher, you might need to repay some benefits, though the SSA typically offers flexible repayment options.

What Special Rules Apply in Your First Year of Retirement?

Social Security offers a special monthly earnings test for your first year of retirement, which can benefit people who retire mid-year after already earning substantial income. Under this rule, you can receive full benefits for any whole month you earn below a monthly threshold (one-twelfth of the annual limit) and don’t perform substantial self-employment services, regardless of your total yearly earnings. For example, if you earned $80,000 in the first half of the year but then retired and earned less than the monthly limit for the remaining months, you could receive full benefits for those later months. This exception applies only in your first year of receiving benefits and can be particularly valuable for individuals who retire partway through a calendar year.

Understanding the Social Security earnings test empowers you to make strategic decisions about when to claim benefits and how much to work during your early retirement years. While the rules may seem complex, they’re designed to provide flexibility while ensuring the program’s long-term sustainability. Whether you choose to claim early and accept temporary reductions or delay benefits for higher lifetime payments depends on your unique financial situation and retirement goals. Consulting with a financial advisor or using Social Security’s online calculators can help you model different scenarios and choose the path that best serves your needs.