How a Job Impacts Social Security
This Retirement Report is the last in a three-part series on Social Security. Click here to read part one, “The Status of Social Security,” and part two, “Social Security and Spousal Benefits.”
You can get Social Security benefits and work at the same time but it’s important to understand how the money you earn could impact your benefit. If you are younger than full retirement age and earn more than the yearly earnings limit, that may reduce your benefit amount.
Full retirement age
Full retirement age (referred to as FRA) is 66 for anyone born between 1943 and 1954. Beginning with those born in 1955, an additional two months is added to the full retirement age each year through 1959. If you were born in 1960 or later, full retirement age is 67. You may begin taking benefits starting at age 62, but they will be permanently reduced.
Covered workers need 40 credits to be eligible for their own benefit, which is about ten years of work history. Your benefit is calculated based on your average earnings over the highest-earning 35 years.
Once you reach full retirement age, there is no longer an earnings limit, meaning you can earn any amount of income without it impacting your benefits.
However, if you begin drawing Social Security benefits before you reach full retirement age and your earnings exceed the eligible limit, your benefits will likely be reduced. You may earn up to $21,240 in 2023 before your Social Security benefits will be reduced. Thereafter, $1 in benefits will be deducted for every $2 earned above $21,240.
In the year you reach full retirement age, you may earn up to $56,520 (in 2023), ending the month before your birthday before benefits are reduced. Thereafter, $1 for every $3 earned above $56,520 will be deducted from your benefits. In both scenarios, however, your benefit will be increased at full retirement age to account for benefits withheld due to earlier earnings.
Earnings Limit Example
For example, suppose you are 65 years old, receive $2,500 in Social Security benefits every month and have a job that pays $2,000 a month. You are over the income limit of $1,770 by $230 each month. During a year, you will receive $24,000 from the job, which is $2,760 more than the annual earnings threshold of $21,240. As a result, $1 out of every $2 above the threshold will be withheld. In this case, $115 will be withheld every month from your Social Security checks. You can expect to receive $2,385 each month from Social Security. When you turn your full retirement age, your payments will be recalculated to give you credit for the withheld portion of your benefit.
Payments are Withheld Temporarily
If you see a change in benefits while working, this adjustment is only temporary. You receive credit for reduced benefits once you reach full retirement age. You could receive bigger Social Security payments later that reflect your continued earnings.
Taxes and Social Security
If you are receiving benefits and working, you’ll want to keep in mind that any income, along with taxable distributions from retirement accounts, dividends, and interest on your investments, can contribute to making your Social Security taxable.
The amount of federal tax you pay on your Social Security benefit is determined by your provisional income. Some Social Security beneficiaries will pay nothing, while others may have to pay federal income tax on up to 85% of their benefit.
If your provisional income is less than $25,000 ($32,000 for a married couple filing jointly), your Social Security benefit is tax-free. If your provisional income is between $25,000 and $34,000 ($32,000 and $44,000 for a married couple filing jointly), up to 50% of your benefit is taxable. If your provisional income is more than $34,000 ($44,000 for joint filers), up to 85% of your benefit is taxable.
Provisional income is determined by adding your adjusted gross income plus 50% of your Social Security benefit plus any tax-exempt income you received for the year.
As part of Your Merkle Plan, we develop a customized plan for retirement income, including Social Security. If you have questions about Social Security or any of the components of Your Merkle Plan, please don’t hesitate to contact us.
Sources: Social Security Administration, “Retirement Benefits.” U.S. News, “What Happens If You Work While Receiving Social Security.”