Applying the Earnings Test

A reader from Texas asks what their Social Security benefit would be if they begin claiming before full retirement age, while still earning $100,000, and when the earnings test would lift.

"I'd appreciate it if you could clarify my situation regarding Social Security benefits while working. I’m a Texas resident, born on 11/02/59, and work full-time with a $100,000 salary. Starting September 2^nd, I will be at Full Retirement Age, and there will be no further deductions while working. However, I'm considering starting Social Security now. How will my monthly benefits be affected, and when would I no longer have a penalty? Would it be on September 2nd or not until January of next year?"

I believe you’re referring to the earnings test, which reduces your Social Security benefits if you earn more than a certain amount yearly before you reach your Full Retirement Age (FRA). I’ll explain the formula in detail later, but it applies only until you reach your FRA. Because you were born in 1959, your FRA is at 66 years and 10 months. You were born on November 2, so you reach your FRA on September 2, at which point the earnings test will be eliminated.

To answer the last part of your question first, because the earnings test goes away in September, your October payment will not be reduced, no matter how much you’re earning. (Social Security pays a month in arrears, so the payment you get in October is for September.)

However, in the months before September, you will be subject to the earnings test. I can’t give you your actual benefit because you didn’t provide your base benefit, which I would need. I can tell you, though, that the earnings test limit is $65,160 in 2026, the year you reach your FRA.

Some people might say, “that’s much higher than I thought.” That’s because it’s the year you reach your FRA. For the years before your FRA year, the limit is only $24,480. Had you claimed last year or earlier and earned more than $24,480, Social Security would have withheld $1 of benefits for every $2 of earnings over that limit.

So, in summary, you’re in the year with the much higher limit, and assuming a $100,000 salary, your benefits will be affected until September. If you were to file today instead of waiting for your FRA in September, you would first experience a reduction in benefits for filing early. That reduction would be applied to whatever your September benefit would be. Instead of receiving your PIA, which is what we call your Full Retirement Age benefit, Social Security will first reduce that benefit by 5/9 of one percent for each month you claim early. (You would be claiming about 5-6 months early.)

Next, Social Security will ask you how much you expect to make this year. If you say $100,000, they’ll subtract $65,160 from $100,000, leaving a projected excess of about $35,000. In the year you reach FRA, not only is the earnings cap higher, but the reduction is also less punitive. Social Security will penalize you $1 for every $3 earned over that limit. So, if you exceed the limit by about $35,000, your benefit reduction will be about $11,600.

Unfortunately, Social Security won’t prorate it and say, “We’re going to reduce your benefit by ‘x’ amount each month.” Instead, they’ll withhold benefits in full until you have satisfied that offset.

You can’t file retroactively unless you wait until your FRA, but had you rushed right down to file after contacting us, you might be due payments for March, April, May, June, July, and August – six months affected by the earnings test. (Even if you couldn’t get an appointment that fast, if you contact Social Security with the intention of filing, the effective date will be immediate.)

Social Security will withhold as many payments as needed to meet the $11,600 threshold. You may not see a benefit for three or four months while they apply the ‘penalty’ to your benefits. Only after that will your benefits kick in – at a slightly reduced rate because you claimed in March instead of waiting until September.

In September, your benefit will increase, and Social Security will recalculate the months it withheld because of the earnings test. It will credit you back and, for example, say, “Okay, we’re going to recalculate your benefit now as if you had claimed in, say, July rather than March because we withheld your March, April, May and June payments” (I don’t know how many months it would take to satisfy that $11,600, since you didn’t provide that information).

Many people don’t realize how the earnings test is applied. We often talk about avoiding it, but rarely discuss how payments are handled if you’re affected. Social Security applies the full reduction until the amount is fully offset, paying you zero for a while, rather than applying a smaller reduction over time until it satisfies the $11,600 threshold.

This example is based on you telling them what you expect to earn in 2026. Once you file your taxes, there will be a reconciliation. Social Security will double-check the calculations and issue you either a credit or a penalty if the amount doesn’t match what you reported.

Based on this – and on the actual size of your benefit – it may not even be worth filing early. If you’re not going to receive a benefit until a couple of months before your FRA, you may opt to wait and receive your full benefit starting in September. You can talk to Social Security to determine exactly when and how much you’ll first be paid if you need those few interim payments. They would use your specific information.

Some might be thinking, “Well, what about the Grace Year? Won’t they apply it monthly?” In your case, they won’t, because it doesn’t help you. If you’re making $100,000 a year, you’re well above the $5,430 monthly earnings test limit, and they’d withhold your benefit for the entire six months.

If it would benefit you for Social Security to apply the monthly calculation in the first year you claim, it would do so. However, doing so would actually penalize you more. You wouldn’t even receive the two or three months of benefits you might receive under a yearly calculation, so Social Security would apply the yearly calculation instead.

I wish you had provided us with your PIA so I could give a more detailed answer. Just remember that they will withhold the full amount for a few months to accommodate the “earnings test penalty,” as you called it. (It’s actually just a reduction in benefits.)

I’m glad we had a chance to discuss the mechanism for applying the earnings test. It has been quite some time since I last did so, and certainly not in this level of detail. Thank you for the question, and good luck to you, however you decide to proceed.