What is the Social Security retirement earnings test and how does it affect your benefits?

If you’re working and collecting Social Security but haven’t yet reached full retirement age, you might be in for a surprise:  the retirement earning test. 

“The first issue with the earnings test is a lot of folks don’t even know it exists until they receive their first overpayment notice,” says Jim Blair, a consultant with Premier Social Security Consulting and contributing author of "2022 Social Security & Medicare Facts."

In essence, Social Security withholds benefits if your earnings exceed a certain level and you’re under your full – or what is also referred to as your normal – retirement age. 

According to the Social Security Administration, one of two exempt amounts apply: a lower amount in years before your full retirement age and a higher amount in the year you attain full retirement age. 

Here’s what experts say you need to know about the retirement earnings test:

There are three versions of the earnings test that may apply, according to Joe Elsasser, the founder and president of Covisum, a financial technology company that sells retirement income software.

Annual earnings test before full retirement age

As of 2022, if you’re between age 62 and the calendar year during which you reach full retirement age, the Social Security Administration withholds $1 in benefits for every $2 of earnings in excess of $19,560. This is also known as the lower exempt amount. Full retirement age is the age at which you would receive 100% of your scheduled Social Security benefit. 

So, for example, if you were 63 in 2022 and earned $39,560, you would have a $10,000 penalty, according to Elsasser. How did he arrive at that number? If your monthly benefit amount was $2,000, you would lose your first five Social Security checks to the earnings test but collect checks for June (paid in July) through the balance of the year, he said.

In December 2021, there were 41,448 retired workers who had their benefits fully withheld due to their earnings. The Social Security Administration does have data that shows how many people subject to the earnings test had their benefits partially withheld. Also of note: the exempt amounts generally increase annually with increases in the national average wage index. 

Annual earnings test in the calendar year in which you reach full retirement age

 For each $3 above the threshold, $1 of benefits is withheld. In 2022, this amount is $51,960.  The earnings test in the calendar year you reach full retirement age is especially interesting because you are allowed to earn the entire annual amount in the months prior to reaching FRA. For example, if your birthday is in June, you could earn $6,000 per month for the entire year and not have an earnings test penalty at all, because only $30,000 of earnings would count against the exempt amount prior to your full retirement age and there is no earnings test at all once you reach full retirement age.   

Monthly earnings test

The monthly earnings test can only be used for one year and is typically used in the year you stop or reduce work.  For each month that you earn less than 1/12th of the annual exempt amount, you are considered retired and can collect a full Social Security check.  This test can be important for someone who retires mid-year and has already earned far more than the exempt amount. 

What counts as earnings?

According to Blair, the earnings test is based on your Social Security wages as reported in box 3 of your Form W-2 and/or, if you’re self-employed, your net profit as reported on your Schedule C, line 31.

The Social Security earnings test is different than any other measure of income as it is not based on adjusted gross income or any version of modified AGI, Elsasser says. “The best way to think about the earnings test countable income is income that you receive as a result of or coincident with your labor in the current period,” he explains.

However, income that comes from pensions, annuities, investments,  interest from savings, IRA and 401(k) distributions, and capital gains is not counted toward the earnings limit, notes Jim Blankenship, a certified financial planner with Blankenship Financial Planning and author of "A Social Security Owner's Manual." 

You won’t know your earnings until year-end

Of course, you likely won’t know your Social Security wages until you receive your year-end W-2, nor will you know your net profit until the end of the year after you tally up your income and expenses.  Given that, the Social Security Administration will ask for your estimated income when you file an application. 

"They may on occasion send a letter asking for the person to call and update the estimate," Blair explains, adding,  “You can change the estimate by informing Social Security (800) 772-1213) of any increase or decrease you notice in your earnings as the year goes on."  

Then, in the following year, he says, Social Security will settle up with the individual, looking at their income and either refund excess withholding or send an overpayment notice if income was underreported. If no estimate is given, the individual will receive an overpayment notice in the following year.”

And, yes, it’s difficult for self-employed workers but they can still estimate an amount, Blair says.

Benefits are not lost

Any benefits withheld while you continue to work are not "lost," according to the Social Security Administration. And once you reach full retirement age, your monthly benefit will be increased permanently to account for the months in which benefits were withheld.

According to Blair, the application of credit months – the months a full benefit is not received due to the annual retirement earnings test -- is automatic.  “Any reduction factor will be changed and reduced by the number of credit months,” Blair says. “This could take nine to 10 months to happen, but any back pay will be sent.”