Your Social Security benefits are determined by a number of factors, but your earned income over the course of your working life is probably the most important—so the more the better. Is Social Security considered earned income? Unfortunately, the answer is “no.”

Key Takeaways

  • Your Social Security benefits will be based on the income you earned during your working years—wages from a job, or net income from self-employment.
  • Only your 35 highest-earning years will be counted.
  • If you take Social Security before full retirement age, then your benefits will be permanently reduced.

How Social Security Benefits Are Calculated

The Social Security Administration (SSA) keeps a record of your earned income from year to year, and the portion of your income that is subject to Social Security taxes is used to calculate your benefits in retirement. The more you earn while working (and the more you pay into the Social Security system through payroll or self-employment taxes), the higher your monthly benefit will be, up to a certain maximum. For 2022, that maximum is $4,194 a month (up from $3,895 a month in 2021).

If you paid into the system for more than 35 years, then the Social Security Administration uses only your 35 highest-earning years and does not include any others in its formula. If you did not pay into the system for at least 35 years, then a value of $0 is substituted for any missing years.

After you apply for benefits, these earnings are adjusted, or “indexed,” to account for past wage inflation and used to calculate your primary insurance amount (PIA). The PIA reflects the benefit that you are eligible to receive once you reach what Social Security calls your full retirement age (FRA). The FRA for anyone born from 1943 to 1954 is 66. For people born after 1954, the age rises by two months annually until it hits 67 for anyone born in 1960 or later.

The age at which you start collecting your Social Security benefits is another important factor. Currently, you can begin receiving benefits as early as age 62. However, your benefits will be permanently reduced unless you wait until your FRA. Conversely, your monthly benefit will increase by 8% annually if you postpone collecting past your FRA, up to age 70, when benefits max out and there’s no further incentive to delay.

Your Social Security benefits may be partially taxable if your income exceeds a certain amount.

What Income Reduces Social Security Benefits?

If you plan to work in retirement and also collect Social Security benefits, then some of your benefits may be temporarily withheld based on your income. Until you reach your FRA, your benefits will be reduced by $1 for every $2 you earn in excess of $19,560 for 2022 (and $18,960 for 2021). In the year you reach your FRA, your benefits will be reduced by $1 for every $3 that you earn above $51,960 for 2022 (or $50,520 for 2021).

Starting with the month when you attain FRA, your benefits will no longer be reduced. Note that these dollars are not lost forever; instead, your Social Security benefit will be increased to account for them after you reach your FRA.

Is Social Security Taxable?

Your income from Social Security can be partially taxable if your combined income exceeds a certain amount. “Combined income” is defined as your gross income plus any nontaxable interest that you earned during the year, plus half of your Social Security benefits. For example, if you’re married, file a joint tax return with your spouse, and your combined income ranges from $32,000 to $44,000, then you may have to pay tax on up to 50% of your Social Security benefits. If your combined income is greater than $44,000, then up to 85% of your benefits may be taxable. For single filers, those income numbers are $25,000 to $34,000 and greater than $34,000.