Separate the 2024 Social Security retirement earnings test from benefit taxation. Work through wages, withholding and the effect on household cash flow.
April 1, 2024 · Financial Forte Staff
Historical article: prepared retrospectively using information available as of April 1, 2024.
Taking a part-time job while receiving Social Security can be a good fit for your life, but it can also change the amount that arrives in your bank account. The answer depends in part on your full retirement age, when you reach it and the type of income you earn.
Two separate issues often get mixed together: Social Security's retirement earnings test and federal income tax on benefits. A person can be affected by one, both or neither. Looking at them separately makes it easier to estimate what work will actually add to household cash flow. This discussion concerns retirement benefits; disability benefits have different work rules.
Check your full retirement age first
Full retirement age is based on birth year; it is not necessarily 65. For retirement benefits, the earnings test generally applies before full retirement age. It can cause benefits to be withheld when earnings exceed the applicable amount. Beginning with the month you reach full retirement age, that retirement earnings limit no longer applies.[1]
For 2024, the lower annual earnings-test amount is $22,320 for someone who remains below full retirement age all year. The withholding rule is generally $1 in benefits for every $2 of earnings over that amount. A different limit and withholding rate apply during the year full retirement age is reached, counting earnings before that month.[1]
Don't use the lower limit automatically if you reach full retirement age during 2024. The applicable higher amount is $59,520, with $1 withheld for every $3 over the limit before the relevant month. The timing of earnings can therefore matter as well as the annual total.
These are retirement earnings-test rules, not the rules for Social Security disability benefits, which require a separate analysis.
Estimate the effect before committing the paycheck
Consider a hypothetical person, Paul, who remains below full retirement age throughout 2024 and expects $30,320 in wages. That is $8,000 above the $22,320 amount. Under the ordinary annual test, the indicated withholding is $4,000: half of the excess. If Paul revises wages downward by $2,000, the ordinary annual-test excess falls to $6,000 and the indicated withholding to $3,000, all else equal.
Paul should not assume that his wages simply add to every dollar of his scheduled Social Security payments. He needs to account for the withholding when planning bills, along with payroll taxes, income tax and work-related expenses.
Actual payment timing can differ from a neat monthly reduction. Social Security may withhold payments to recover the required amount. Paul should confirm the expected administration with the agency rather than dividing $4,000 by twelve and assuming that is exactly how each payment will change.
Do not assume the withholding estimate describes the effect on every future benefit payment. Ask Social Security how the withheld months affect the later benefit calculation; this example evaluates current-year cash flow.[1]
That later adjustment doesn't pay this month's bills. The cash-flow effect still deserves attention before Paul commits the job's expected income to another expense.
Identify which income belongs in the test
Wages and net earnings from self-employment generally matter for the retirement earnings test. Pensions and investment income are not treated the same way for that test. A withdrawal from an IRA can therefore raise a separate tax question without necessarily being wages counted against the earnings amount.[2]
Self-employment and the first year of retirement can introduce additional details, including a special monthly rule in certain circumstances. Someone retiring partway through the year should ask about the rule that fits the actual work pattern instead of applying a full-year example mechanically.
Report expected earnings accurately and update the estimate if work changes. An extra project or more hours can affect a plan that initially fit below the threshold. Waiting until the next tax return to notice the change can create an avoidable surprise.
Keep gross wages, take-home pay and net self-employment earnings distinct when gathering information. The relevant test does not simply use the amount deposited into checking.
Review benefit taxation separately
Federal taxation of Social Security benefits uses an income calculation that considers other income and part of the benefits, including relevant tax-exempt interest. It is different from the retirement earnings test and can matter after full retirement age as well.[3]
Depending on the calculation, up to 85 percent of benefits may be included in taxable income. That does not mean an 85 percent tax rate applies. The tax depends on the return's circumstances and applicable rates.
Paul's wages could therefore affect both benefit withholding before full retirement age and the income-tax calculation. The two effects should be modeled together in his household plan, while remaining clearly distinguished.
A tax projection can also help determine whether withholding or estimated payments need adjustment. It should include the expected work income, benefits actually relevant to the tax calculation and other sources of income.
Decide what work adds to your life and finances
The financial calculation is one part of the decision. Work may provide purpose, social connection or a gradual transition away from a full-time schedule. It may also create transportation costs or reduce time available for family and other priorities.
Start by confirming your full retirement age and the earnings rule for this year. Then estimate wages, work expenses, potential benefit withholding and taxes separately. You can make a more confident choice when the expected improvement in your life is paired with a realistic picture of the money that will actually be available.
Related reading
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Educational information, not personalized investment, tax, legal or benefits advice. Examples use hypothetical assumptions. Verify current rules and your circumstances before acting.
