11 Confusing Social Security Rules and What They Really Mean

I like to think Social Security isn't intentionally confusing. After all, it's a tough job to design a program that addresses so many situations. There are high-income workers and low-income workers, early retirees, and late ones. Plus, there are children, spouses, ex-spouses, and widows and widowers to consider.

For all those scenarios, there are rules -- confusing ones. And while you don't need to know how Social Security works from top to bottom, it would be nice to understand, basically, how benefits should work for you and your family. If you agree, read on for a breakdown of 11 important but convoluted Social Security rules.

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Your full retirement age, or FRA, is when you qualify for your full Social Security benefit, as calculated by the benefit formula. There are a couple confusing aspects here. One, not everyone has the same FRA. Mine is 67, because I was born after 1959. If you were born in, say 1957, your FRA would be 66 and six months.

You can find your FRA here.

Two, the benefit amount that's calculated from your earnings is only what you get if you start collecting Social Security at your FRA. Your actual benefit will be higher if you delay your benefits, or lower if you file for Social Security early. Read on for more detail on how these adjustments work.

ALSO READ: What's the Social Security Benefit Formula?

You can collect Social Security once you've been 62 years old for at least one month. However, your benefit is reduced when you collect before your FRA.

That reduction is calculated in two tiers and based on the number of months before FRA that you start receiving benefits. If you claim up to 36 months before your FRA, the reduction is 5/9 of 1% for each month. For any additional months beyond 36, your benefit is lowered by 5/12 of 1%.

An example hopefully makes this less confusing. Say your FRA is 67 and you want to claim at 62. That's five years early, or 60 months. Or, it could be 59 depending on where your birthday falls in the month. But assuming 60 months, the reduction is 5/9 of 1% for 36 months plus 5/12 of 1% for 24 months. The math works out to a total potential reduction of 30%.

If you postpone your benefits past FRA, you earn delayed retirement credits -- another way of saying that your benefit goes up. The math is simpler than the reductions for claiming early. Assuming you were born after 1942, Social Security raises your benefit by 2/3 of 1% for each month you hold off on collecting -- until you are 70. At 70, your benefits start whether you like it or not.

The tricky part here is figuring out whether the delay is worth it. When you delay your Social Security benefits, you are forgoing income up front -- a cost you shouldn't dismiss. Say you could collect a $1,500 benefit today or wait three years for a $1,950 benefit. In those three years, you'd miss out on $54,000 of income.

You'd have to collect the higher $1,950 benefit for 10 years to break even. You may not like that trade-off if your health is faltering or you're prioritizing quality of life now.

ALSO READ: How Your Social Security Break-Even Age Affects When You Should Claim Benefits

To qualify for Social Security benefits, most people need to work and pay FICA taxes for 10 years. The rules behind that conclusion are, as you might guess, slightly more complicated.

Social Security operates on a credit system. Before you can receive benefits, you must have earned 40 credits. You earn those credits by earning wages or reported self-employment income.

The amount of earnings needed for one credit changes from year to year. In 2022, you collect a credit for each $1,510 in earnings. The 10 years comes into play because you can earn, at most, four credits per year. Earn the maximum four credits per year for 10 years and you'll have met the 40-credit requirement.

The Social Security formula calculates your benefit from an average of your historical earnings. Specifically, the calculation averages the earnings from your 35 highest-paid years of working. So, if you've held wage-earning jobs for 40 years, your five lowest-income years are not counted.

The formula also accounts for working less than 35 years. Say you work for 10 years to earn your 40 Social Security credits. Once you reach age 62, you could collect a benefit -- but it won't be an impressive one. The 35-year formula will account for your 10 years of working and then use zeros for the other 25 years. Those zeros will pull down your average and, in turn, your benefit.

For this reason, it's helpful to plan for 35 years of working before you claim your benefits. That way, you avoid watering down your average income.

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You can collect benefits on your spouse's earnings record, even if you haven't worked enough to earn 40 Social Security credits. Your spouse must be receiving benefits, though, before you can collect on his or her record.

Spousal benefits max out at 50% of the earner's benefit. So if the earner's benefit at FRA is $3,000 monthly, the spousal benefit would be, at most, $1,500. The spouse who claims earlier than FRA will get less -- since spousal benefits are also reduced when collected early. Spousal benefits collected before FRA are also subject to the earnings limits.

Unfortunately, spousal benefits do not qualify for delayed retirement credits.

If you are married, but have qualified for Social Security on your own, you'll receive your own benefit. In cases where the spousal benefit is higher, Social Security adjusts your benefit up so you receive the higher amount.

ALSO READ: Claiming Social Security Spousal Benefits? These 3 Rules May Surprise You

Before you reach FRA, there are limits to how much you can earn while you are collecting Social Security. If you exceed the limit that applies to you, your benefit is reduced until you reach FRA.

The first limit applies when you are under your FRA for the entire year. In 2022, that limit is $19,560. For every $2 you earn above that limit, your benefit is trimmed by $1. The second limit, which is much higher, applies in the year you reach FRA. Exceed this threshold and your benefit is cut by $1 for every $3 you earn above the limit. In 2022, this limit is $51,960. Both earnings thresholds can change from one year to the next.

Once you reach FRA, you can earn as much as you want and it doesn't affect your benefit. If you intend to continue working, it usually makes sense to postpone Social Security until you hit your FRA. Otherwise, work part-time and keep your earnings below the annual thresholds.

You do earn Social Security credits when you are self-employed -- that is, if you report those earnings to the IRS.

Your net earnings from self-employment are your gross sales less allowed business deductions. Gross sales do not include dividends or interest, rental income (unless you're a real estate dealer), or limited partnership income. You'd report these earnings with IRS Form 1040, Schedule C, and Schedule SE.

Schedule SE walks you through the calculation of your self-employment tax, which is the self-employed equivalent of FICA taxes. Self-employment and FICA taxes are your contributions to Social Security and Medicare.

You may be eligible for monthly Social Security benefits if you are a widow or widower of a Social Security beneficiary and you are 60 or older. You can collect a reduced survivors benefit at age 60. You can also remarry after age 60 and it won't affect that benefit.

If you've qualified for Social Security on your own earnings record, you can collect the survivors benefit at 60 and then switch to your retirement benefit (if it's higher) later. But if you're already receiving your own retirement benefit, you can't switch to a survivors benefit unless it's more than your existing retirement benefit.

If you are disabled or retired, your unmarried children may qualify for benefits on your record. Benefits are available to kids who are younger than 18, younger than 20 and attending high school full-time, or older than 17 with a disability that began before age 22.

Children, like spouses, can receive up to 50% of your full benefit. However, Social Security enforces a maximum family payout of 150% to 180% of your benefit. If the normal benefit for your children and spouse combined exceeds that family maximum, they'll receive less than the 50%.

An ex-spouse can also receive benefits on your earnings record. Fortunately, the ex-spouse's benefit does not apply to the family maximum.

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Surprise! Your Social Security benefit may be taxable. The level of taxation depends on how much you earn from other forms of taxable income -- like wages, self-employment income, and investment income.

Not surprisingly, Social Security defines a term just for this purpose. It's called combined income. Your combined income is your adjusted gross income plus nontaxable interest plus half of your Social Security benefits.

If you are a single filer with combined income of $25,000 to $34,000, you'll pay taxes on 50% of your Social Security benefits. If you're married and file jointly, this range is $32,000 to $44,000. Earn above those ranges and you pay tax on 85% of your Social Security benefit. Earn below those ranges and your Social Security isn't taxable at all.

If you still have questions or points of confusion about how Social Security works, rest assured there are many additional resources. One of the most practical is my Social Security, an online portal that estimates your benefit and your spouse's benefit at different ages. You can also review Everything You Need to Know About Social Security Benefits and the many learning resources at SSA.gov.

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