How Working Affects Your Social Security Benefits

Are you considering working while collecting Social Security as part of your retirement? Even if you're thinking about occasionally working part-time, when it comes to working and earning Social Security, you've got to be careful. If you begin earning too much money at work, your income might be reduced. In addition, you might end up paying more taxes for your benefits from Social Security.

When you are retired, if you claim at your full retirement age, you are entitled to receive 100% of your benefits from Social Security. The age will vary depending on your year of birth. Those who are turning 62 in the year 2018 will be able to fully retire at 66 and four months and begin collecting Social Security.

Claiming Social Security Early Reduces Benefit

Claiming benefits early means you get less Social Security income each month than if you had waited until full retirement age. Thus, if you can wait until full age, or even later, that may be a good strategy. For every month you claim before the full retirement age, the monthly benefit you receive will go down by a fixed percentage. This means that you could claim an income that is nearly a third less than if you would have waited.

Claiming early and earning too much means the amount you get later may be reduced even more. This year, people who earn over $16,920 will have a dollar held back for every two earned above the limit. Those who hit full retirement age in 2017 can earn $44,880, but have their benefits decline by a dollar for every three over the maximum limit—so it's important to seriously consider work duration and collecting benefits along with the risks of claiming benefits early. (For related reading, see: How Does My Part-Time Job Affect Social Security?)

How a Reduction in Benefits Occurs

In 2018, the limits go up slightly. Your earnings can go up to $17,040 and you will not have your benefits affected. Turning full retirement age and claiming in 2018 means you can earn $45,630 without a reduction in benefits. The reduction will not be spread out over the year; instead, monthly benefit payments will be halted until the amount reduced is covered and then you will begin receiving your monthly checks again.

Since there is no pro-rating, you will not receive income from Social Security until the amount is covered. Then the rest of the checks will begin arriving every month until the end of the year, with any extra money withheld paid back to you the following year. It is not forfeited but added into your benefit calculation to increase your benefit when you hit full retirement age.

Income Limit After Full Retirement Age

The income limit on working only applies if you are younger than full retirement age. Those who have already reached full retirement can earn as much as they wish and it will not reduce the benefits they receive. The limit also applies to work earnings, not the money you gain from investments, annuities, pensions, etc. Individuals who are self-employed will find Social Security will base their income on their net earnings. (For related reading, see: Social Security for the Self-Employed: How It Works.)

Paying Taxes on Social Security Benefits

If you are working and earning money while receiving your Social Security benefits, you could be looking at a larger tax bill. While many won't have to pay taxes on their income, about a third of those who receive benefits pay taxes on part or all of their income. If you earn enough, you may have as much as 85% of your income from Social Security taxed. 

The IRS figures out how much of your benefits will be taxed based mainly on your adjusted gross income. To determine if you will be taxed on your benefit, add half of your expected income to your other income and tax-exempt interest. If that comes out to over $25,000 for you alone or over $32,000 for a married couple, you can bet on some of your benefits being taxable. If it is more than $34,000 for you or $44,000 for a married couple this year, you may fall into that 85% social security tax bracket.

You may want to keep working in retirement to keep busy, earn more, or supplement your benefits. However, if you claim benefits early or work after reaching full retirement age and receiving benefits, it is advisable to look into what you earn and how it may affect said benefits. Being well-informed is half of the work.

(For more from this author, see: How Longevity Is Transforming Retirement Planning.)