By W Financial Advisors • Wealth Wednesday Brief • 3–5 min read
SCENARIO
When Sharon retired from her corporate job at 63, she planned to do some consulting work she'd always enjoyed while also starting her Social Security benefits. Her advisor raised a flag.
"Before we go ahead, let me walk you through the earnings test," he said. "Depending on how much consulting income you bring in, your Social Security payments may be reduced, at least temporarily."
Sharon was surprised. She'd had no idea that working and receiving Social Security simultaneously had rules attached to it.
THE CONCEPT
The Social Security earnings test applies to anyone who is receiving Social Security retirement benefits before reaching Full Retirement Age and who also has earned income from work.
The rules work as follows:
For years before the year you reach FRA: If your earned income exceeds $24,480 (2026 figure, adjusted annually), Social Security will withhold $1 in benefits for every $2 earned above that limit.
In the calendar year you reach FRA: A more generous limit applies. You can earn up to $65,160 (2026) before any withholding. Above that threshold, $1 is withheld for every $3 earned.
Once you reach Full Retirement Age: The earnings test no longer applies. You can earn any amount without affecting your Social Security benefit.
Important distinction: "earned income" means wages or self-employment income. It does not include investment income, pension payments, or other forms of retirement income.
EXAMPLE
Let's look at Sharon's situation. She expects to earn $40,000 from consulting in the year she's 63. She plans to receive $1,800/month in Social Security.
Her earnings above the $24,480 limit: $40,000 - $24,480 = $15,520. Social Security withholds $1 for every $2 over the limit: $15,520 ÷ 2 = $7,760 in withheld benefits that year.
At $1,800/month, $7,760 represents approximately four months of benefits withheld. In practical terms, Social Security might withhold her checks entirely for several months until the offset is satisfied, rather than paying a reduced amount monthly.
At 67, when Sharon reaches FRA, Social Security recalculates her benefit to account for the months that were withheld. Her monthly benefit increases slightly to compensate, spreading the withheld amount back in as a permanent (if small) increase.
The net result: the withheld benefits aren't lost, they're deferred. But the temporary cash flow reduction is real and can affect planning.
STRATEGY
For retirees who plan to work part-time and collect Social Security before FRA:
- Model your expected earnings. If your earnings are unlikely to exceed the annual limit, the earnings test may not affect you. Many part-time or occasional consulting arrangements stay well below the threshold.
- Consider the timing of income. For self-employed individuals or those with variable consulting work, timing income recognition (within legal limits) may help manage proximity to the threshold.
- Evaluate whether claiming at 62 is still optimal. If significant earned income will trigger the earnings test anyway, waiting to claim until FRA (or later) may be preferable; you would receive a higher permanent benefit and avoid the complication of the earnings test entirely.
- Recalculate after FRA. Once you reach FRA, confirm with Social Security that your benefit has been appropriately adjusted upward to reflect any withheld amounts. This should happen automatically, but confirming it is worthwhile.
COMMON MISTAKE
The most common mistake is deciding to claim Social Security early without accounting for planned part-time work, only to find mid-year that benefits are being withheld and cash flow is disrupted.
A subtler mistake is assuming that withheld benefits are lost. They are not lost; they result in a higher monthly benefit at FRA. But this longer-term payback does not replace the near-term cash flow disruption, which can matter significantly if someone is depending on both their earnings and their Social Security to fund current expenses.
KEY TAKEAWAY
The Social Security earnings test is a cash flow consideration for those who plan to work before FRA; withheld benefits are eventually returned as a higher monthly payment, but understanding the temporary impact allows for better planning.
SOURCES & REFERENCES
1. Social Security Administration. How Work Affects Your Benefits. Publication No. 05-10069. Earnings limits adjusted annually. ssa.gov.
This article is for informational and educational purposes only and should not be construed as personalized investment, tax, or financial advice. All examples are hypothetical and for illustrative purposes only. Please consult a qualified financial professional regarding your individual situation.This information may not be relied upon for the purpose of determining your Social Security benefits or eligibility, or avoiding any federal tax penalties. You are encouraged to seek advice from your own tax or legal professional.
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