How Earning Too Much Affects Your Social Security
If you’re planning to collect Social Security while still working, you need to understand how your income affects your benefits. The Social Security Administration (SSA) sets annual income limits—known as the earnings test—that determine whether your benefits will be temporarily withheld. Here's what you need to know.
Social Security Earnings Limits Explained
In 2025, the SSA has set the following earnings limits:
Under Full Retirement Age (FRA): $23,400/year
If you exceed this, the SSA will withhold $1 for every $2 earned over the limit.
Year You Reach FRA: $62,160/year
For income earned before your birthday month, the SSA withholds $1 for every $3 over the limit.
Prior to the passage of the Senior Citizens Freedom to Work Act in 2000, the earnings penalty applied all the way until age 70. Prior to that, working seniors were limited in how much they could earn before age 70.
The Senior Citizens Freedom to Work Act changed that to your full retirement age (FRA).
For many years the FRA was 65. For people born prior to 1938, FRA was 65.
For Americans born in 1960 or later it is 67. For Americans born between 1943 and 1954, it is age 66. For people born after 1938 and before 1943 there was a sliding scale of 65 plus so many months before they reached their exact FRA. If you were born after 1954 but before 1960 there is a similar scale of 66 plus months for you to calculate your exact FRA.
If you are between age 62 and your FRA there is a limit to what you can before the government withholds some or all of your Social Security benefits.
Remember this is an earnings penalty and not a tax. Social Security has a benefit formula at FRA to treat the months that you did not receive a check as if you had not elected benefits for that month.
According to the Social Security Administration (SSA)
The earnings limit for workers who are younger than the "full" retirement age (see Full Retirement Age Chart) will increase to $22,320. (We deduct $1 from benefits for each $2 earned over $22,320.)
The earnings limit for people reaching their “full” retirement age in 2024 will increase to $59,520. (We deduct $1 from benefits for each $3 earned over $59,520 until the month the worker turns “full” retirement age.)
There is no limit on earnings for workers who are "full" retirement age or older for the entire year.
What Happens If You Exceed the Income Limit?
If your income exceeds the allowed threshold, Social Security benefits will be withheld—not permanently lost. Instead of reducing your monthly benefit, the SSA will withhold entire checks until the overpaid amount is covered. For example:
You earn $30,000 while under FRA
That’s $6,600 over the limit
SSA withholds $3,300 in benefits
Will You Get Those Benefits Back Later?
Yes. Once you reach full retirement age, the SSA recalculates your monthly benefit to account for months when benefits were withheld. This means your benefit amount will increase, compensating for what was held earlier.
Planning for Retirement: Social Security and Your Income
Here at Trustway Accounting, we understand the importance of planning for a secure and comfortable retirement. Social Security plays a vital role in that plan, providing a foundation of income for millions of Americans.
Benefit Type of Social Security
Social Security offers a variety of benefits, including:
Retirement benefits: This is the most common benefit, providing monthly payments to qualified individuals upon reaching retirement age.
Survivor benefits: These benefits offer financial support to the spouses and children of deceased workers who contributed to Social Security.Disability benefits: These benefits provide financial assistance to individuals with disabilities who are unable to work.
Understanding how your income can affect your Social Security is crucial for making informed choices about your retirement.
How the Social Security Administration (SSA) Calculates Withholding
When you start collecting Social Security retirement benefits before reaching full retirement age and continue to work, the Social Security Administration (SSA) may withhold some of your benefits depending on your earnings. However, not all sources of income are treated equally. The SSA specifically focuses on what is known as earned income to determine whether any benefits should be withheld.
What Counts as Earned Income?
The SSA defines earned income as income you receive from working. This includes:
Wages from a Job: If you're employed and receive a paycheck from an employer, those wages count.
Net Earnings from Self-Employment: If you operate a business or work as an independent contractor, your net profits (income after business expenses) are included.
These types of income are subject to the annual earnings limit, which can reduce your monthly Social Security payments if exceeded.
What Does Not Count Toward the Earnings Limit?
Several common types of income are not considered earned income and therefore do not count toward the earnings limit. These include:
Pensions and Annuities: Retirement benefits from prior employment or investment vehicles.
Investment Income: This covers dividends, interest, and capital gains from stocks, bonds, or mutual funds.
Rental Income: Money earned from leasing real estate is excluded unless you're actively managing rental property as a business.
Other Passive Income: Any income where you are not materially participating (such as limited partnerships) is generally excluded.
This distinction is important because it allows retirees to continue receiving Social Security benefits without penalty, even if they have substantial income from these other sources.
Special Rule for the First Year of Retirement: The Monthly Earnings Test
If you retire mid-year and start collecting benefits after already earning income earlier in the year, the SSA applies a monthly earnings test instead of the annual limit.
Here’s how it works:
For the months you receive Social Security benefits, the SSA checks whether your earnings exceed a monthly limit (which is 1/12 of the annual limit).
If your monthly earnings are below that limit in any given month, you can receive your full benefit for that month — regardless of how much you earned earlier in the year.
This rule provides flexibility for those transitioning into retirement, allowing them to collect benefits for the months they work less (or not at all) without being penalized for earlier income.
The SSA’s withholding calculations are based only on earned income, such as wages or self-employment profits. Income from pensions, investments, and rentals typically doesn’t affect your benefits. And if you're retiring mid-year, you may qualify for a monthly test that could reduce or eliminate withholdings during your first year of retirement.
Why This Matters for Retirement Planning
Understanding how SSA calculates benefit withholding is crucial to your retirement planning strategy. Here’s why:
Avoid Unpleasant Surprises
Many retirees are shocked to find their Social Security checks reduced because they continued to work without understanding the earnings limit. Knowing the rules in advance allows for proactive adjustments.Optimize the Timing of Retirement
If you're close to the annual earnings limit, delaying benefits or reducing work hours may help you avoid withholdings and collect the full benefit amount.Maximize Multi-Stream Income
Retirees often rely on a combination of Social Security, pensions, investments, and part-time work. Knowing that most non-wage income doesn’t count against your limit helps you structure your income sources more effectively.Take Advantage of the Monthly Earnings Test
Planning your retirement date to benefit from the monthly test (e.g., retiring early in the year) could allow you to collect more benefits than you otherwise would under the annual test.Temporary Reduction, Not a Loss
It’s important to note that withheld benefits due to excess earnings are not lost—they are credited back to your record, increasing your benefit amount once you reach full retirement age. Strategic planning can make this work to your advantage.
Planning when and how to claim Social Security benefits involves more than just picking a date. The SSA’s withholding rules play a big role in shaping your retirement income, especially if you continue working. By understanding the difference between earned and unearned income and how the SSA applies both annual and monthly tests, you can make more informed decisions that align with your long-term retirement goals.
Smart Strategies to Minimize Benefit Loss
If your income is likely to exceed the limit, consider these strategies:
Delay taking benefits until you retire fully
Reduce hours or switch to part-time work
Maximize income from non-countable sources
Use retirement accounts or deferrals to manage income
You can also use SSA’s retirement planner tools to run projections and determine the best filing strategy.
Earning Money Without Reducing Social Security Benefits
The good news is that you can continue earning money without jeopardizing your Social Security benefits once you reach your Full Retirement Age (FRA). This age varies depending on your birth year; you can find the exact age for you on the Social Security Administration website: Social Security Administration.
Here are some ways to continue earning income after reaching your FRA:
Work for a traditional employer: There is no limit on your earnings from a traditional job after your FRA.
Start a business: Owning your own business allows you to set your own hours and continue generating income.
Invest in income-producing assets: Dividends from stocks, interest from bonds, and rental income from real estate can all supplement your Social Security benefits.
Important Note: There are limitations on how much you can earn before your FRA without facing a reduction in your Social Security benefits. For the most up-to-date information on these limits, please refer to the Social Security Administration website
Tips for Different Life Stages
For pre-retirees: Maximize your Social Security benefit by working until your FRA or later, if possible. Consider ways to generate additional income streams for your retirement years.
For retirees: Explore options for continuing to earn income after your FRA, such as part-time work, consulting, or starting a small business. Remember to stay updated on the latest Social Security regulations regarding income limitations.
For those already receiving benefits: There are resources available to help you manage your finances and optimize your Social Security benefits. Trustway Accounting can help you navigate these complexities.
During the year that you attain your full retirement age, the exempt amount increases to $40,080, and for every $3 you earn above the exempt amount, $1 will be withheld from your Social Security benefits.
If you are working for somebody else your gross wages or salary is considered to be earned income by Social Security. If you are self-employed then only your net earnings count in the earnings test. Unlike income tax calculations employee contributions to pension or retirement plans are included in gross wages by the Social Security Administration.
This only applies to active earnings. Government benefits, investment earnings, interest, pensions, annuities, rents, and capital gains are not considered earnings by Social Security and do not apply toward the calculation of the earnings penalty.
Frequently Asked Questions (FAQ)
Can I work and collect Social Security?
Yes, but you may face temporary withholding if your income exceeds the limit.
What income counts toward the earnings limit?
Only wages and self-employment income.
What happens to withheld benefits?
They are credited back to you in the form of a higher monthly payment once you reach full retirement age.
Should I delay Social Security if I plan to keep working?
If your earnings are high, delaying may help you avoid a temporary loss and increase your future benefits.
Conclusion
The Social Security earnings test can feel like a penalty, but it’s really just a timing issue. With proper planning, you can minimize the impact and maximize your long-term benefits. Talk to a retirement planner to explore income strategies and make informed decisions.
Social Security is a cornerstone of retirement planning. By understanding how your income interacts with Social Security benefits, you can make informed decisions to secure your financial future. Trustway Accounting is here to help you navigate the intricacies of Social Security . Give us a call today at 205-463-5260
