DEFINITION of 'Covered Earnings'

The total amount of an employee's pay that is eligible for use in the calculation of retirement benefits. Generally, the bulk of covered earnings arises for the employee's base pay; however, other types of compensation can be considered as part of the covered earnings amount. In the United States, covered earnings are work-related earnings that are subject to Social Security taxation.

BREAKING DOWN 'Covered Earnings'

Covered earnings typically include most types of wage income and any self-employment income. Some exceptions include earnings from certain state and local governments, and from railroads. Retirement benefits, whether from Social Security or pensions, are based on the amount of money the worker has earned and the amount that was paid towards the retirement plan.

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