The 2020 Social Security Earnings Test: A Complete Guide

One of the most frequently misunderstood Social Security concepts is whether you can work and collect Social Security benefits at the same time. Unfortunately, there isn't an easy answer. You can claim benefits while you're still working, but depending on a few factors, you may not be able to receive all of your retirement benefits while you're still in the workforce. It all depends on something known as the Social Security earnings test.

With that in mind, there are a few things you need to know about the Social Security earnings test if you plan to work and collect Social Security retirement benefits simultaneously:

• What is the Social Security earnings test?
• What is your Social Security full retirement age?
• How your Social Security claiming age affects your benefits
• The earnings test has three categories: Which are you in?
• The 2020 Social Security earnings test limits
• What types of income count toward the earnings test?
• How does the Social Security administration know what you'll earn in 2020?
• How is the earnings test applied to your Social Security benefits?
• Should you claim Social Security if the earnings test will reduce your benefits?

So, let's take an in-depth look at each of these, so you'll know what to expect and be equipped to make the best decisions when it comes to your own Social Security benefits:

The Social Security earnings test sets an upper limit on how much certain Americans can earn from working while simultaneously collecting Social Security. Image source: Getty Images.

What is the Social Security earnings test?

If you've earned enough credits during your working lifetime, you can claim Social Security retirement benefits at any point between ages 62 and 70. It's a well-known principle that the earlier you claim within this window, the lower your monthly benefit will be.

In addition to this, the Social Security Administration uses a process called the "earnings test" when it comes to Social Security beneficiaries who are still working. We'll get into the specifics later on but the general idea is that depending on your age and how much money you earn from your job, some or all of your benefits can be withheld. Effectively, if you claim Social Security before reaching your full retirement age, there's a limit to the amount of money you can earn from working while still collecting benefits.

What is your Social Security full retirement age?

As I mentioned in the previous section, there are two main components to the earnings test – your age and your earned income. First, let's look at the age issue.

As you'll see in the next section, the earnings test is based on your Social Security full retirement age (FRA) and whether you've reached it or not. So, one important piece of the puzzle is knowing what your full retirement age is. Many Americans (even many of those who have already claimed Social Security) don't know their full retirement age, so here's a quick guide:

Data source: Social Security Administration

How your Social Security claiming age affects your benefits

It's worth mentioning that regardless of your FRA, you are allowed to start your Social Security retirement benefits as early as age 62 or as late as age 70. Your FRA is simply when you'll receive your full monthly benefit as calculated by the Social Security Administration (SSA), also known as your primary insurance amount, or PIA. If you start benefits before FRA, your monthly check will be permanently reduced. Conversely, if you start benefits later than your FRA, your checks will be permanently increased.

Depending on when you decide to claim your benefit, there are three rules that can be used to increase or decrease your benefit:

• If you claim Social Security before FRA (but within 36 months of reaching it), your retirement benefit will be reduced by 6.67% per year (about 0.56% per month) early, for as many as 36 months before full retirement age.
• If you claim Social Security more than 36 months before reaching FRA, your benefit will be reduced by 20% plus an additional 5% for every year (about 0.42% per month) beyond 36 months before reaching FRA.
• If you claim Social Security after reaching FRA, your Social Security benefit will be permanently increased by 8% for each year (0.67% per month) beyond your FRA, to as late as age 70.

You may be wondering why I'm discussing the Social Security benefit formulas in a guide about the earnings test. Here's the point – these are the guidelines that determine how much you'll receive every month if you aren't working. If you're working, your benefits can be lowered depending on how the earnings test affects you.

The earnings test has three categories: Which are you in?

For the purposes of the earnings test, the Social Security Administration groups beneficiaries into three categories. And to be clear, these don't apply only to retirement benefits – people who receive Social Security Survivors Benefits or Spousal Benefits who also earn money from a job are subject to the earnings test as well.

• Beneficiaries who will reach FRA after the current calendar year
• Beneficiaries who will reach FRA during the current calendar year
• Beneficiaries who have reached FRA before the current calendar year

So, here's what you need to know about how the earnings test applies to each of these categories:

1. You will reach full retirement age after 2020

This is the most restrictive form of the Social Security earnings test and applies to beneficiaries who won't reach their FRA until January 2021 or later. For example, if you reach age 62 in 2020 and claim Social Security, this is the earnings test that will apply to you.

If you are in this category, you can earn as much as $18,240 in 2020 without affecting your Social Security benefits. This translates to $1,520 per month, so if you earn less than this amount, you're free to receive your Social Security benefit with no reduction (other than the permanent reduction for claiming early).

If you earn more than this threshold, your benefits will be withheld at a rate of $1 for every $2 by which your 2020 earnings exceed $18,240. And if the calculated reduction exceeds your total Social Security benefit for the year, your entire benefit will be withheld.

2. You will reach full retirement age during 2020

The second category includes Social Security beneficiaries who will reach their full retirement age during 2020. The earnings test still applies to this group, but it's a far less restrictive version.

• First, the income threshold is more generous. In 2020, beneficiaries who are going to reach their FRA during the year can earn as much as $48,600 annualized ($4,050 per month) before they even have to worry about the earnings test.
• Second, the penalty for exceeding the threshold is less severe. If you are in this category and earn more than $4,050 per month in 2020, your benefits will be withheld at a rate of $1 for every $3 by which you exceed the threshold. Just as I discussed in the previous section, if your calculated reduction is more than your Social Security benefit, all of your benefit for the year will be withheld.
• Third, only the months before your birthday month will be considered. In other words, if you'll reach full retirement age in July 2020, you only need to worry about the earnings test through June.

3. You reached full retirement age before 2020

The final category is beneficiaries that have already reached FRA before January 1, 2020. As you may have guessed from the previous section, the earnings test doesn't apply to these beneficiaries at all.

For example, if your full retirement age is 66, and you turned 66 in 2019, you won't have to worry about the earnings test at all in 2020. Even if you earn a six-figure salary, you can collect your entire Social Security check every month. In fact, Warren Buffett gets his full Social Security payment each month despite being one of the wealthiest people in the world with a large income.

If you stop working during 2020, a special rule applies

If you fall within one of the first two categories, there's a special rule that applies if you plan to retire in 2020.

The short version is that no matter how much you earn in 2020, if you permanently stop working during the year, you can collect your entire Social Security check for the rest of the year.

For example, let's say that you turn 62 in September 2020, and decide to retire (and claim Social Security) at that point. We'll also say that you earned $100,000 prior to your September retirement. Even though this is well in excess of the applicable earnings test limit for a 62-year-old, you're free to collect your Social Security benefit in the months after you retire with no withholding whatsoever.

The idea here is that the Social Security earnings test isn't intended to affect retirees (people who have stopped working altogether), so this provision makes sure that it doesn't.

The 2020 Social Security earnings test limits

Now that we've done an in-depth look at how the earnings test work, here's a quick reference table that puts all of the earnings test limits in one place. The earnings test limits are modified each year to keep up with inflation, so I've also included the 2019 limits for reference.

Data Source: Social Security Administration.

Example of the Social Security earnings test

To help illustrate how this works, let's take a quick look at an example of the earnings test in action.

Let's say that you were born in July 1955. This means that you'll be 65 years old at the end of 2020, and therefore will reach your full retirement age of 66 years and two months after 2020 ends, so the most restrictive earnings test applies to you.

We'll say that your calculated Social Security benefit, including the permanent reduction for claiming early, is $1,400 per month. You still work, and your salary is $36,000 in 2020, or $3,000 per month.

• Your salary of $3,000 per month is $1,480 higher than the earnings test threshold.
• Based on a withholding rate of $1 for every $2 over the limit, this means your benefit should be reduced by $740 per month.
• Since your calculated monthly benefit is $1,400 per month, this reduces your monthly Social Security benefit to $660 per month for 2020.

What types of income count toward the earnings test?

If you earn a bunch of income from investments, such as dividend or interest payments, or from rental real estate you own, don't worry – that type of income isn't a factor when it comes to the earnings test.

Specifically, the Social Security earnings test only considers earned income. This mainly refers to income from a job, self-employment income such as consulting or freelancing work, or income from a business where you have an active role in the day-to-day operations.

It also doesn't consider any retirement income. For example, if you take a distribution from a retirement account like your IRA or 401(k) in 2020, it doesn't count toward your earnings test limit.

How does the Social Security administration know what you'll earn in 2020?

Obviously, the Social Security Administration doesn't have a crystal ball that can predict your 2020 earned income. The agency has no idea if you plan to retire during the year or change your job situation. So, you have to tell them.

In a nutshell, if you expect to earn more than your applicable earnings test limit in 2020, it is your responsibility to tell the SSA. You'll have to tell them how much you expect to earn for the year, and you can do this quickly over the phone (unfortunately, this can't be done online yet). Alternatively, you can go to your nearest SSA office, but the phone option is likely to be the quicker choice by far.

How are earnings test withholdings applied to your Social Security benefits?

The way benefits are withheld as a result of the Social Security earnings test may sound strange. Instead of the withholding spread out over the entire year as equal amounts from each monthly check, any benefit reduction is applied all at once in the beginning of the year.

In other words, the SSA will withhold all of your benefits until the estimated earnings test withholding amount is met. And any excess withholding will be refunded to you in the following calendar year.

Here's an example. Let's revisit our previous example of a beneficiary for whom the earnings test results in a $740 monthly benefit reduction. This translates to $8,880 per year. Since this individual's calculated Social Security benefit is $1,400 per month, the SSA would need to withhold the first seven months' worth of benefit payments for the year in order to satisfy the earnings test requirements.

So in this case, the January through July benefit payments would be completely withheld and the August through December 2020 payments would be made in full. And because a total of $9,800 would be withheld over the seven-month period, the $920 by which this exceeds the earnings test withholding amount would be refunded in 2021.

Should you claim Social Security if the earnings test will reduce your benefits?

To be perfectly clear, any Social Security benefit reduction due to the earnings test is a withholding, not lost money. In other words, any money that is withheld because of your earned income can serve to permanently increase your Social Security benefit once you reach full retirement age. So, if your primary goal is to maximize your cash flow as soon as possible, it can still be a good idea to claim Social Security even if you might get hit by the earnings test.

On the other hand, if you earn too much, it's possible that the earnings test could cause all of your benefits to be withheld, in which case there isn't much of a point to claim at all.

The short answer is that if you're going to be impacted by the earnings test, the best move depends on your specific situation. And now that you've learned the ins and outs of how the earnings test works, you'll be in a good position to decide what's best for you.