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How the Social Security Earnings Limit Works

Dana Anspach

March 26, 2024

If you claim Social Security before a designated age, which varies based on your date of birth, and if you continue to work and earn more than a specified limit, you will owe some of your Social Security back. This is how the Social Security earnings limit works. Once you reach the designated age, the earnings limit no longer applies, and you can collect Social Security and continue to work and earn any amount without penalty.

Let’s look at how this earnings limit works and how to avoid it.

Meet Peggy. Born in 1961, Peggy attains age 63 in 2024. She worked in retail her whole life, spending the past twenty-five years in management. Peggy divorced 14 years ago, is still single, and has no children.

According to the Social Security Administration, Peggy’s Full Retirement Age (FRA) will be 67, at which point she will be entitled to full Social Security retirement benefits. FRA is a government-set limit that varies based on your year, month, and day of birth. It is gradually rising, and for those born on the second day of 1960 or later, it is 67.

If you begin benefits before reaching FRA and continue working, then the Social Security earnings limit applies, and it could reduce your benefits if you earn too much.

Because Peggy is feeling the aches and pains you’d expect after decades in retail, she is exploring the possibility of dialing back her work hours and starting to collect Social Security benefits early at age 63, four years before her Full Retirement Age.

How much can Peggy earn before Social Security benefits are reduced?

The earnings limit in 2024 is $22,320, or $1,860 per month (up from $21,240 in 2023). Peggy can earn up to $22,320 in 2024, and her Social Security benefits will not be reduced.

Thank goodness Peggy is savvy and exploring this now because if she doesn’t understand the rules, she could be in for a big, unpleasant surprise. Many folks begin Social Security benefits in their early 60s, thinking they can receive their full benefit amount while continuing to work and earn income.

A year or so later, they get a notice that they must return some of their Social Security benefits. That happens because of the Social Security earnings limit. If they have already spent the money, this can be a big shock and result in financial hardship.

How the Social Security earnings limit works.

Suppose you begin Social Security benefits before your Full Retirement Age and continue to work, earning more than the “earnings limit,” either as an employee or as a self-employed person. In that case, your benefits are reduced for years when your earnings exceed the limit.

Once you reach Full Retirement Age (FRA), you can earn an unlimited amount, and no reduction will apply.

Note: Under this rule, income from investments, pension benefits, IRA withdrawals, and unemployment benefits does not count as earnings.

How does the reduction work?

For the years before reaching Full Retirement Age (FRA), Social Security will take back $1 of Social Security for every $2 you earn over the earnings limit amount.

Before the year you reach FRA, Social Security considers your income for the entire year, even if you were not entitled to Social Security for the entire year. However, if you stop working completely, a special rule allows them to look at it month by month.

For example, assume you turn 62 in June. From January to May of that year, you earn $35,000. Then, you retire and start collecting benefits. If you don’t work again, you’re fine and you’ll collect your Social Security with no reduction. But what if you pick up part-time work in October and earn $2,000 a month? Starting in October, a reduction in benefits will apply, and your income for the entire year will count toward calculating the reduction.

Once you attain FRA, this odd whole-year rule no longer applies. For example, the year Peggy reaches age 67, only earnings before the month she reaches FRA count.

Example: In the year she turns age 63, Peggy earns $50,000, the earnings limit is $22,320, and she receives $1,400 a month ($16,800 per year) in Social Security retirement benefits. In this example, she earns $27,680 over the earnings limit ($50,000 less the $22,320 limit). Social Security can take back up to $13,840 of her benefits – ($1 for every $2 of earnings over the limit). Yes, that is a lot. This reduction applies to any year before you reach FRA.

The rule above applies until the year you reach FRA. A larger earnings limit and a different rule apply the year you reach FRA. In 2024, the limit on earnings for the year you reach FRA is $59,520, or $4,960 a month (in 2023, it was $56,520).

If you collect Social Security benefits during the year you reach FRA, Social Security will deduct $1 in benefits for every $3 you earn over this higher limit.

During the year you reach FRA, Social Security only counts earnings you receive before the month you reach FRA. So, if Peggy were 67 in 2024, but had started her benefits early, and is still working with expected earnings of $4,960 per month or less for the first half of the year, then reaches FRA part way through the year, the earnings limit would not apply to her for that year, as her earnings before the month of reaching FRA were less than the $4,960 monthly or $59,520 annual limit.

The Social Security website offers an earnings test calculator. You can plug in your date of birth and expected earnings to see if a reduction applies to you.

The earnings limit and self-employment income

The rules get more complicated if you are self-employed and plan to collect Social Security retirement benefits before your FRA. The Social Security website’s Special Earnings Limit Rule states that two tests must be met to be considered retired and not subject to the earnings limit.

  1. Your earnings cannot exceed the monthly amount of $1,860 if you are under FRA for the entire year, or $4,960 if it is the year you attain FRA, and,
  2. You must not have performed substantial services in self-employment, defined as devoting more than 45 hours a month to the business or between 15 and 45 hours to a business in a highly skilled occupation.

If you claim Social Security before FRA and have self-employment income, be prepared to verify hours worked in the business by month. If there were months where you did not perform substantial services for the business, no reduction in benefits would apply for those specific months. You can find more details on the Earnings and Self-Employment page of ssa.gov.

When will the Social Security earnings limit be increased?

The earnings limit is adjusted each year depending on the formal measure of inflation based on the Consumer Price Index (CPI). In years where the earnings limit doesn’t change or only changes a little, the CPI recorded low or negative inflation in the prior year.

What else do I need to know?

If you have a spouse or other family member who receives Social Security benefits based on your Social Security record and you go back to work and exceed the earnings limit, your dependents’ benefits may be reduced, too. This can apply when there are spousal benefits or benefits for dependents, such as minor children. See the Social Security publication How Work Affects Your Benefits for additional details.

What should Peggy do?

The safest way for Peggy to avoid the Social Security earnings limit is to wait until she reaches FRA, age 67, to begin drawing Social Security benefits.

Perhaps she can reconfigure her job duties and continue working. If that doesn’t work, she can work part-time and use some of her savings or retirement money to tide her over until she reaches FRA. If Peggy is healthy and has a normal life expectancy, these solutions may be a better option for her than starting Social Security early.

However, some people must start benefits because they are laid off and have no other income or assets. If this happens to you, but your situation changes later, and you go back to work, you can withdraw your application for Social Security within 12 months of starting benefits. However, you must pay back any benefits received within those 12 months.

For those who get caught by the earnings limit

If you find yourself in a situation where the earnings limit applies, don’t panic. The benefits withheld because of the earnings limit will eventually be returned to you. There is a ‘recalculation’ that happens.

The result of this recalculation is that once you reach FRA, any withheld amounts are put back in the mix and slowly paid back to you with each monthly check. However, because you claimed earlier than FRA, your benefit will be permanently reduced relative to the monthly amount you receive if you begin benefits at your FRA or later.

If you face an unplanned early retirement, it may be beneficial to use savings to supplement your income and delay the start of Social Security so that if you find another job, the earnings reduction will not apply.

This introduces one of the many complex rules around claiming Social Security. To learn more, check out the Control Your Retirement Destiny podcast (particularly Episode 3 on Social Security) on either iTunes or Podbean.