General Social Security

Note: The Social Security earnings limit changes each year. The most current version of this article uses numbers for 2023.

At one of my first speaking engagements, I heard a great story from one of the attendees. Her experience provides us with one of the best examples I’ve ever heard of how much the Social Security income limit can catch you by surprise. 

A few years earlier, she’d been at her bridge club when the topic turned to Social Security. As she and the other card players chatted about the best way to leverage Social Security Benefits, the consensus around the table seemed to be that filing at 62 was the smartest thing to do. 

This lady, trusting the advice of some of her closest friends, did just that: She filed for benefits as soon as she turned 62. 

She then told me she’d always wanted to buy a brand-new Toyota Camry. She figured that, once she started receiving Social Security income, it would be the perfect time to buy the car. She was still working, which meant her Social Security check would be extra income. 

As she told the story to me, she bought the car and took out a car loan to do it. She planned to repay the loan using some of the income she expected to receive from her Social Security benefits since she filed for them.

Imagine her surprise, then, when a nasty letter from Social Security Administration showed up in her mailbox.  The letter claimed she had been paid benefits that she was not eligible for!

The Social Security Administration not only asked her to pay the benefits back, but also informed her that future benefits would be suspended due to her income. 

Now she had a new car and a car loan, without the Social Security benefits she planned to use to handle that monthly payment. What happened here?

Something that surprises more than just the poor Camry owner who approached me that day: the Social Security income limit. 

What Is the Social Security Income Limit? 

The earnings limit is also known as the income limit, or the earnings test. The official term is “earnings test,” but income limit and earnings limit are the terms that you’ll hear most often.

For our purposes, know that all these terms mean the same thing — and there are four quick facts about the Social Security income limit that you should know before we jump all the way into explaining the test or limit: 

1. Be aware that we are talking about Social Security income limits for retirement benefits, not disability or SSI. 
2. The earnings limit on Social Security is not the same as income taxes on Social Security. Don’t get the two confused! 
3. The earnings limit does not apply if you file for benefits at your full retirement age or beyond. These limits only apply to those who begin taking Social Security benefits before reaching full retirement age. 
4. The earnings limit is an individual limit. If you are still working, and your spouse is drawing Social Security, your earnings will not count towards their income limit. 

Why We Have An Earnings Limit 

Not long ago, a viewer on my YouTube channel asked me to give her a good reason why we have the Social Security earnings limit. The comments that followed showed how many viewers shared the belief that the earnings limit is unfair and should be eliminated. 

In my response, I explained that the rationale behind the entire program of Social Security was to create a safety net. The original intent of the Social security program was not to supplement retirement income, but to keep the elderly (most of whom lost any potential long-term wealth in the Great Depression) out of poverty. 

I also added that today’s earnings limit is relatively generous compared to where the Social Security earnings limit began. The original Economic Security Bill (which is what the Social Security Act was originally called) President Roosevelt sent to Congress featured a very restrictive earnings limit.

That bill stated, “No person shall receive such old-age annuity unless . . . He is not employed by another in a gainful occupation.”

Whoa! This means that if you had even a single dollar in wages from a job, you could not collect a Social Security benefit at all. 

(If you’re curious, you can read more about the history of the Social Security earnings limit here.)

Thankfully, the system we have in place today allows for individuals to have some earnings from work while they are receiving a Social Security benefit.

However, it’s very important to stay informed on the dollar amount of this limit because it changes every year. 

For 2023, the Social Security earnings limit is $21,240. For every $2 you exceed that limit, $1 will be withheld in benefits.

The exception to this dollar limit is in the calendar year that you will reach full retirement age. For the period between January 1 and the month you attain full retirement age, the income limit increases to $56,520 (for 2023) without a reduction in benefits. For every $3 you exceed that limit, $1 will be withheld in benefits.

This means that if you have a birthday in July, you’ll have a 6 month period with an increased income limit before it’s dropped completely at your full retirement age. This increased limit and decreased withholding amount allow many individuals to retire at the beginning of the calendar year in which they attain full retirement age, rather than waiting until their actual birthdays. 

Again, once you reach full retirement age, there is no reduction in benefits regardless of your income level. 

A Real-Life Example of the Social Security Income Limit in Action

To put these numbers into context, let’s look at an example of how this might work in a real-life scenario:

Rosie is 64 years old. She started taking Social Security benefits as soon as she turned 62. Based on her birth year, her full retirement age is 66.

Right now, Rosie is eligible for $20,000 in Social Security benefits per year. She also worked during the year and made $31,240 in wages.

The question we want to understand is, how much was Rosie’s benefit reduced by working while on Social Security? To answer that, we first need to calculate how much Rosie was over the Social Security earnings limit for her age.

In 2022, Rosie filed for Social Security; she received her first check in January of 2023. Throughout the year she received $1,667 in benefits every month. Without knowing the rules, she also worked and earned $31,240 in wages.

With a Social Security earnings limit of $21,240, she was over by $10,000:

$31,240 Total Wages – the Social Security Income Limit of $21,240 = $10,000 Income in excess Of limit

Because this is a full calendar year during which Rosie is receiving benefits but is not yet full retirement age, the benefits reduction amount is $1 reduction for every $2 in excess wages. Since she was over the limit by $10,000, her benefits will be reduced by $5,000.

The benefit reduction calculation would appear as follows:

$10,000 Income in Excess of Limit x 50% ($1 reduction for every $2 over limit) equals a $5,000 Benefit Reduction

With a $5,000 benefits reduction for exceeding the income limits, Rosie’s $20,000 yearly Social Security benefit will be reduced to a $15,000 benefit for the year. In the following year, she would attain her full retirement age and after her birthday, the limit would no longer apply.

How Does The Income Limit Affect Spousal, Survivor, or Children’s Benefits? 

There are millions of individuals who receive benefits as an “auxiliary” of a retired or disabled worker. These auxiliary beneficiaries are also subject to the same earnings test.

See the chart below for more detail on how the limits are applied to each type of benefit.

Special Monthly Income Limit Rule for the First Year (or, Your Grace Year) 

Many people who retire mid-year have already earned more income than the limit allows. This is why there is a special rule where the earnings limit switches from an annual limit to a monthly limit. (These monthly limits are 1/12 of the annual limit.)

This rule allows you to receive a check for any month you are considered “retired” by the SSA even if you have already exceeded the annual earnings limit.

That sounds straightforward enough — but the interpretation of “retired” as defined by the SSA can cause some confusion. Here’s what they mean by this term:

You are retired if your monthly earnings are 1/12 of the annual limit ($1,770 for 2023) or less and you did not perform substantial services in self-employment.

Essentially, you are considered retired unless you make more than the income limit. The rule for the year you reach full retirement age also applies when working with the monthly limit. In this calendar year for 2023, the limit is $4,710 (1/12 of $56,520).

It’s very important to remember that in the year following this first year, the monthly limit is no longer used and the earnings limit is based solely on your annual earnings limit. 

How the Earnings Limit Is Applied 

The most confusing part of the benefit reduction due to income is how it’s reflected in your monthly benefits deposits. Instead of taking out a little bit every month, the SSA will withhold several months of benefits at a time.

If you predict in advance that you will have excess earnings and report this to the Social Security Administration, they may take a few months of benefits before you actually earn the anticipated excess earnings.

For example, if your Social Security payment is $1,667 per month, and you expect to receive $31,240 in wages from your job, the Administration would calculate that you’ll be over your earnings limit by $10,000 and thus $5,000 in benefits should be withheld. So, they would withhold your benefit payment from January to March. In April, your checks would resume. 

If you don’t report excess income before you earn it, then you have to report this information after the fact. You can do this when you file your income tax return, but the preferred method is to be proactive and call your local Social Security Administration office.

If you wait for the Social Security Administration to learn of your excess earnings via your tax return, there could be a significant gap between the time you earn the excess income and the time that they withhold your benefits. In most cases, it’s better to report the excess earnings quickly so the benefits reduction occurs closer to the time you actually earn that extra income.

Regardless of whether your benefits are withheld in advance or in arrears, benefits withholding can make budgeting and planning difficult, especially if you don’t understand the system. You may need to create a separate savings account to set some of those earnings aside to compensate for benefits withholding that will occur in the future. 

What Kind of Income Counts as Earnings?

The Social Security income limit applies only to gross wages and net earnings from self-employment. All other income is exempt, including pensions, interest, annuities, IRA distributions, and capital gains.

The term “wages” refers to your gross wages. This is the money that you earn before any deductions, including taxes, retirement contributions, or other deductions. 

If you want to see a more in-depth conversation about what counts as income for the earnings limit, see my article on the Social Security Income Limit: What Counts as Income?

What to Do If Your Benefits Are Already Being Withheld 

If you’re subject to the Social Security earnings limit, don’t wait for the SSA to start reducing the benefit you receive. Instead, I’d recommend voluntarily suspending benefits.

If you wait for the Social Security Administration to discover that you’ve earned too much working while receiving benefits, your risk of an overpayment notice is higher.

Either way, you aren’t missing payments that you’ll never get back. Your benefit amount will be recalculated at your full retirement age (or when you stop working) to reflect the months that benefits were withheld. 

The best way to avoid the earnings limitation is to wait until full retirement age to file for benefits. If you can’t wait, make sure you have a clear understanding of how working impacts your Social Security benefits.

If you still have questions, you could leave a comment below, but what may be an even greater help is to join my FREE Facebook members group. It’s very active and has some really smart people who love to answer any questions you may have about Social Security. From time to time I’ll even drop in to add my thoughts, too. 

You should also consider joining the nearly 400,000 subscribers on my YouTube channel! For visual learners (as most of us are), this is where I break down the complex rules and help you figure out how to use them to your advantage. 

One last thing that you don’t want to miss: Be sure to get your FREE copy of my Social Security Cheat Sheet. This handy guide takes all of the most important rules from the massive Social Security website and condenses it all down to just one page.

Social Security credits are the building blocks that the Social Security Administration relies on to determine whether or not you qualify for one of its programs.  In 2021, you receive one credit for each $1,470 of earnings, up to the maximum of four credits per year. The amount of earnings needed to earn a credit increases annually as average wage levels increase.

One stipulation is that your earnings must be subject to Social Security tax to count for a credit.  In exchange for this tax, you are eligible for the following important benefits:

• Social Security Retirement Benefits
• Social Security Disability Benefits
• Social Security Survivor Benefits
• Medicare

Each of these programs have different requirements for the number of credits to gain eligibility.  Here’s a quick look at the eligibility for each. 

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“Do stay at home moms get Social Security benefits?”

My wife asked me that question a few weeks ago after the topic came up over lunch with friends. She thought she knew the answer, but after hearing the varied opinions of her friends she was confused.

Here’s how I explained it to her in one sentence.

“Social Security benefits are paid to eligible spouses and children if the working spouse becomes disabled, dies or retires.”

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Getting answers to your Social Security questions can be really frustrating.

I’ve talked to many individuals who have nearly given up and just accepted what they were being told (even if it didn’t make sense). One client, Mr. Brewer, really stands out in my memory. He’d been looking for answers for a long time and had just returned from the local Social Security office. He was red-faced angry! “Devin, why is Social Security so &#%!@ complicated?”

Thankfully, he wasn’t directing his anger at me but at an almost incomprehensible set of Social Security rules.

Why It’s So Difficult to Get Answers To Your Social Security Questions

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If you retire and file for Social Security and then later decide to return to work, will your Social Security benefit increase to reflect the taxes you’re paying? Or do all those tax dollars just go down the drain?

The answer depends on two things:

1) Your earnings history
2) How much you are making now

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If your Social Security earnings have been recorded incorrectly, it could make a big difference in your benefit amount. You need to check for errors yourself — and you need to do it now. Today!

Whether you are close to retirement, or in your early working years, this is something that absolutely cannot wait.

Why the rush? Because the Social Security Administration imposes time limits on correcting your earnings record — even if the mistake on your record is not your fault!

Mistakes in the Social Security earnings record are fairly common. For proof, look no further than the Earnings Suspense File. This is where earnings reports with a mismatched name and SSN combination are stored.

Since the inception of Social Security, there have been a total of $1.2 trillion in wages that could not be matched to an earnings record. Because sthey couldn’t be matched, they were added to the Earnings Suspense File. In tax year 2012 alone, the Social Security Administration reported $71 billion added to the file!

Those numbers are astronomically high, which begs the obvious question: why are there so many mistakes within the Social Security earnings records?

Why Mistakes Tend to Happen With Social Security Earnings Records

To be clear, most of these mistakes are not the fault of the Social Security Administration. A good number of the mismatches are due to employer reporting errors or administrative errors that happen when people change names. Others are due to the fraudulent use of Social Security numbers.

The Social Security Administration has a pretty good system for figuring these mistakes out and assigning the earnings to the correct record — but even with their process, nearly half of the mismatches are never corrected.

Unless you’re vigilant about monitoring your earnings record, you could have earnings gaps that could have a substantial impact on your Social Security benefit calculation.

A mistake in your earnings calculation can make a big difference. How? It all goes back to how your benefit is calculated. The Social Security Administration uses your highest 35 years of earnings as a cornerstone of the benefit calculation.

If any of these 35 years are incorrect or missing altogether, the average is skewed. One year of missing earnings can make a big difference in your benefit amount.

Unless you’re vigilant about monitoring your earnings record, you could have earnings gap that could have a substantial impact on your Social Security benefit calculation.

Errors Can Dramatically Affect How Much in Social Security Income You Can Claim

Let me give you an example of how this can affect your benefit amount. For this example, I used the actual online calculator from the Social Security Administration. If you want to follow along, you can just go to the Online Calculator and crunch the numbers for yourself.

In the example calculation I ran, I assumed the following:

A worker has 35 years of earnings that started in 1984 and ended in 2018. Instead of going for a really high annual earnings amount, which would have exaggerate the effect, I assumed that this individual started in 1984 with a salary of $35,000 and had a 2% raise every year.

Under that assumption, this individual would have a full retirement age benefit of $2,418 dollars. That’s the baseline benefit amount we’d expect this person to receive.

But what happens if information is missing from the earnings record? I went back to our calculation and assumed just one year of earnings in 1990 wasn’t included on the worker’s record due to clerical error.

For one missing year, the benefit would decrease to $2,385 dollars. For two missing years, it would decrease to $2,353 dollars. For three, it would be $2,322. For four, it would be $2,291 and for five, it would be $2,260.

That’s a difference of $158 dollars per month.

Now, you might be thinking, Devin, that doesn’t sound like such a crisis. $158 extra per month would be nice, but that’s not paying for much.

Maybe not when we look at it on a monthly basis. But how would this affect you over your entire retirement?

If we take those same amounts and assume a annual cost of living adjustment of 2%, you’ll see that the effect is now measured by thousands of dollars.

For one year, it’s nearly $8,000 in reduced benefits. For two, it’s over $15,000. For three, it’s slightly over $23,000. At four years, it’s more than $30,000, and at 5 years, it’s nearly $38,000.

I don’t think anyone would willingly give up any of those amounts.

The Burden of Proof Is on You When Correcting Your Record

If you did look at your earnings record and notice a mistake, the burden is yours to prove it. You might want to start by checking out the SSA’s Request For Correction of Earnings Record form.

You should be prepared to locate documents that prove the error such as tax forms, W-2 forms or pay stubs. If you can’t find these, don’t despair quite yet.

In the SSA manual, the Administration states that an oral or written statement from the employer can serve as primary evidence of wages. Or, the Social Security Administration also says you can take the following steps:

1. Write down the name and address of your employer
2. Note the dates you worked there and how much you earned
3. Provide the name and Social Security number you were using while you were employed

The SSA will then use this information to investigate the problem. But even if they can help you investigate, you still have to remember there’s a time limit to making these corrections.

The Social Security Administration’s Time Limit For Corrections

The Social Security Administration’s language on the time limit for fixing an earnings record is incredibly clear:

“An earnings record can be corrected at any time up to three years, three months, and 15 days after the year in which the wages were paid or the self-employment income was derived.”

How’s that for clarity! Without an exception, you have a little over 3 years to fix earnings record mistakes. Unfortunately, the rules on those exceptions aren’t as clear.

Here’s what the SSA says about the issue:

After the time limit has passed, earnings records can only be revised under the conditions described below and in §1425:

1. To correct an entry established through fraud;

2. To correct a mechanical, clerical, or other obvious error;

3. To correct errors in crediting earnings to the wrong person or to the wrong period;

4. To transfer items to or from the Railroad Retirement Board (if reported to the wrong agency), or to add railroad earnings to Social Security earnings records when the law permits;

5. To add wages paid in a period by an employer who made no report of any wages paid to the worker in that period, or if the employer is increasing the originally reported amount for the period;

6. To add or remove wages in accordance with a wage report filed by the employer with IRS; or, if a State or local governmental employer, with SSA if the report is filed within the time limitation specified for assessment, refund, or credit under a State’s coverage agreement;

7. To add self-employment income in a taxable year if an individual or the individual’s survivor establishes that:

   1. A self-employment tax return for that year was filed before the time limit ran out; and

   2. Either no self-employment income for that year has been recorded in the individual’s earnings record, or the recorded self-employment income for that year is less than the amount reported on the self-employment tax return; or

8. To add self-employment income for any taxable year up to the amount of earnings that were wrongly recorded as wages and later deleted. This can be done only if a tax return reporting such self-employment income is filed within three years, three months, and 15 days after the taxable year in which the earnings wrongly recorded as wages were deleted. The self-employment income must:

   1. Be for the same taxable year as the year in which the wages were removed; and

   2. Have already been included on the individual’s Social Security record.

9. Prior to the expiration of the time limit the worker or the worker’s survivor has:

   1. Applied for benefits and stated that the earnings for a year(s) were incorrect; or

   2. Requested a revision of his or her earnings record for a year(s).

Here’s the boiled down version of the exceptions: The only case where an exception does not apply is when a self employed individual does not file his/her taxes within the time limit.

Like many of the Social Security rules, the rule on time limits are broad and sometimes not completely understood by the technicians at the Social Security Administration. I’ve seen cases where there was a clear exception, but the technician refused to enter the earnings because they did not understand the rule.

Thankfully, this client was able to get help from a financial planner who understood the rules and helped the client draft a request for review letter. A few weeks later, the earnings were back where they should be: on the client’s earnings history.

While that case had a happy ending, it should highlight the importance of not just checking your Social Security earnings report… but making sure you or the right professionals who can help you get the error corrected ASAP.

How to Check Your Social Security Earnings History

Checking your earnings history with the Social Security Administration is easy. You can find the details in your Social Security statement.

(If you’re younger than 60, you only get these every 5 years. For those over 60, you get one every year.)

If you don’t have a recent statement, don’t let that stop you. Go online and instantly print your most recent statement.

To create a My Social Security account, visit www.ssa.gov/myaccount. You’ll need to provide a Social Security number, mailing address and a valid e-mail address. You’ll also need to be able to answer questions that only you are likely to know and it needs to match the information on file with Social Security.

In addition to checking your earnings history, there are many other other reasons to set up your online account. You can:

• Get an estimate of your future benefits
• Get a letter with proof of your Social Security benefits
• Start or change your direct deposit
• Get a replacement SSA-1099 or SSA-1042S for taxes
• Change your address

Please, please, please…check your Social Security earnings history today! And don’t stop there. Urge your friends, family members and clients to do the same. Better yet, just share this article!

Ignoring this could cost you thousands of dollars in missed Social Security benefits, whereas checking your record only takes 5 minutes. It’s a worthwhile use of time!

If you still have questions, you could leave a comment below, but what may be an even greater help is to join my FREE Facebook members group. It’s very active and has some really smart people who love to answer any questions you may have about Social Security. From time to time I’ll even drop in to add my thoughts, too. 

You should also consider joining the 100,000+ subscribers on my YouTube channel! For visual learners (as most of us are), this is where I break down the complex rules and help you figure out how to use them to your advantage. 

One last thing that you don’t want to miss: Be sure to get your FREE copy of my Social Security Cheat Sheet. This handy guide takes all of the most important rules from the massive Social Security website and condenses it all down to just one page.

If you are a minister, you have several key tax issues that makes you uniquely different from other taxpayers. These differences include the housing allowance, self-employed treatment for W-2 wage earners and the big one…the ability to opt out of Social Security.

All of these tax differences can create a great deal of complexity, and should only be handled with a team of competent tax and financial advisers. However, the ability to irrevocably opt out of Social Security is probably the most complex financial planning issue for new ministers as it carries a high degree of long-term consequence if the wrong decision is made.

If you are a new minister, I know this decision can be complicated. It’s more than just a financial decision.  If you opt out, you must agree to the following language:

I certify that I am conscientiously opposed to, or because of my religious principles I am opposed to, the acceptance of any public insurance that makes payments in the event of death, disability, old age, or retirement; or that makes payments toward the cost of, or provides services for, medical care. 

That’s weighty for sure, but my focus for this article is not to debate the ethical and moral issues of opting out, the good Lord knows there’s already been plenty written about that.   My goal is to examine the economic aspects of opting out.  Specifically, I want to help quantify what it would take to replace the benefits that you’re walking away from.

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