Last week I received a note that in addition to all the celebrations I listed, May is also Older Americans Month and that it is a time to recognize all the ways older adults contribute to our communities everyday. We certainly celebrate all of you that give back in so many ways and the knowledge you are willing to share.
Monday Morning Quarter-Buck
By Kim Anderson, CPA
Fargo, North Dakota
This great question came from my colleague Sandy who said she knows a lot of people who quit working at their W2 job and rejoin the company as a 1099 contractor. She wanted to know: for those people, how does continuing to work affect their Social Security benefits?
Let’s start by assuming these folks have not yet started taking Social Security benefits. When their benefit is calculated at age 62, the highest 35 years of earnings are factored into the formula. If a person does not have 35 years of maximum earnings, it is always possible to replace of those low or zero earning years with higher earning years. Social Security updates people’s earnings record every year – so continuing to work may increase their benefits.
Next, let’s look at a situation where someone is 62 years old (but their full retirement age is 66), they are collecting Social Security but also return to work as a 1099 contract employee. For anyone under full retirement age, $1 in benefits is withheld for every $2 earned over the earnings test threshold. In 2019, that person could earn up to $17,640 before triggering a reduction in their benefits.
To illustrate, let’s say that Sandy gets $24,000 in reduced annual Social Security benefits (reduced because she started drawing at 62 rather than at 66) and because she continues to work, she earns $30,000 in wages from working (pensions and investment income don’t count). That is $12,360 over the exempt amount in 2019 ($30,000 - $17,640 = $12,360). So $6,180 would be withheld (half of $12,360), leaving Sandy with a benefit of $17,820 ($24,000 - $6,180 = $17,820).
An important factor to consider is that in the year someone turns full-retirement age, the earnings test is higher - $46,920 as of 2019. In the months leading up to the month someone turns full retirement age, the reduction amount will be $1 for every $3 she earns over the threshold. Once the worker turns full retirement age, there will be no further benefits reduction.
On a related note, if someone is 62 and still working but not collecting Social Security benefits and their spouse files for Social Security on their own record (not on the record of the 62 year old), the benefits of the spouse collecting Social Security but not working will not be affected by the working spouse’s earnings test. In other words, the earnings test applies to the worker who is collecting benefits and working, not to the spouse who is collecting on their own work record and not working.
How are Social Security benefits reduced? Because the exact amount to be withheld can’t be known until earnings are known, there may be lag time in benefits reduction. When benefits are withheld because of excess earnings, they are generally pulled all at once – that is, monthly checks stop until the entire amount is withheld. After that, regular payments resume. Working retirees need to plan for this event so that they can avoid cash-flow shocks.
Finally, it is important to note that the benefits reduction due to the earnings test are not truly lost. Instead, at full retirement age benefits are increased to account for those months in which benefits were withheld. It is also important to note that the full benefit reduction for applying early at age 62 is never made up.
NOTE: This blog post discusses the Social Security earnings test, not the taxability of Social Security benefits.
Have more questions for Kim on Social Security and/or Medicare? Contact her at Kim@RootedPG.com. We will help you make the decision that is right for you in your specific situation.