earnings test
January 11, 2017 | by Chris Stein, CFP®, Finance Instructor at Colorado State University
Questions on the Earnings Test

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This week we received the following multi-part question from a blog reader/listener about how the Social Security Administration (SSA) administers the Earnings Test.  For those of you unfamiliar with the Earnings Test, please refer to our previous posts on this topic for clarification. You can find these posts by searching for “Earnings Test” in the search box on this site.  On to the question from a reader who is age 62 and still working, earning about $1,450 per month in 2017 and is concerned about the earnings test, particularly in the first year she is claiming:

Question #1

“How do they know how much you are making every month?”

Answer:  Essentially there are two ways the SSA finds out how much you are making.  First, you can simply tell them.  They will then adjust your benefit to reflect the effects of the Earnings Test immediately.  Secondly they will find out because your employer reports your earnings to the SSA.  So every year the SSA has a record of your earnings for the previous year.  Since your earnings exceed the limit under the Earnings Test ($16,920 in 2017) you are subject to the test.

Question #2

“How do they pull benefit or penalize you for being over?”

Answer:   If you do not tell them about your earnings, they will figure out at the end of the year what they should have withheld and then in January they will begin withholding your ENTIRE benefit each month until the amount you were overpaid the previous year is paid back.  It is for this reason that it is best to be up front with them and tell them what you are earning so they can reduce the benefit monthly.  In your case the reduction will be quite small.  You are only making about $480 over the $16,920 earnings limit for 2017.  Your benefit will be reduced $1 for every $2 you are above the limit; therefore your annual reduction is $240, or $20 per month.  Your benefit should be$1,430 per month after applying the Earnings Test.

Question #3

“I also might wonder, if it is a monthly earning amount and going over by $1 is the same as going over by $1000, could someone who gets paid quarterly be only penalized in the month they get paid and not penalized the other two months while working and waiting to be paid at the end of the quarter?”

Answer:  The Earnings Limit is an annual amount, with an exception I will discuss below.  The timing of when you earn the income during the year is irrelevant.  Also, the earnings are counted by when your EARN them, not when you are paid.  So earnings in December count for that year, even if you don’t get the check until January (rules for self-employed are different).  Additionally, going over by $1 is NOT the same as going over by $1000.  The Earnings Test reduces your benefit $1 for every $2 over the limit.  I you are over by $1000 for the year, they will reduce your benefit by $500.

Special Rule

Although it was not expressly asked, I do want to mention a special rule that applies in the year you retire.  First, remember that in the month you reach your Full Retirement Age (FRA) the Earnings Test goes away COMPLETELY.  So from that month forward you can earn any amount and your SS benefits will be unaffected.  Before your FRA there is a special rule for people retiring and then claiming Social Security.  On a one time basis you can elect to have the SSA apply the Earnings Test on a monthly basis, rather than on a yearly amount.  This helps people who retire mid-year, say in June when they may have already earned far more than the $16,920 annual limit in 2017.  By electing to have the Earnings Test applied on a monthly basis the SSA will ignore all earnings before you filed for your benefit, then apply the Earnings Test at $1,410/month.  As long as in the months following claiming you earn less than $1,410 you will be unaffected by the Earnings Test.  Also note, that in the year you turn your FRA the Earnings Test limits are much higher ($44,880 in 2017).

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