What Income Reduces Your Social Security Benefits?

Editor's Note: This story originally appeared on SmartAsset.com.

If someone receiving Social Security benefits earns too much money by working, the Social Security Administration may reduce the amount of that person’s benefits.

This only affects people who start taking benefits before reaching their full retirement age as set by the SSA. And only income earned from working has this effect.

Other types of income, such as dividends, interest and capital gains from investments, aren’t counted by Social Security for this purpose.

Here’s how it works.

Earning While Receiving Social Security Benefits

Opting to receive Social Security retirement or survivor’s benefits does not mean you can’t get income from other sources. And extra money from a part-time job or from investments can help stretch a Social Security check and make retirement more comfortable.

However, people who opt to receive their benefits before reaching full retirement age (FRA) — age 67 for people born in 1960 or later, for example — can only earn up to a certain amount each year before Social Security starts reducing their benefits. The earnings cap is adjusted for inflation. For 2022, if you’re under FRA, it is $19,560 .

Once annual earnings reach the cap amount, for every $2 a Social Security recipient under FRA earns, the total annual benefit gets reduced by $1.

For instance, say a recipient gets $1,000 a month in benefits ($12,000 a year) and starts a part-time job that pays $20,000 a year, which is above the earnings cap. Subtracting $19,560 from $20,000 yields $440. Dividing $440 by 2 gives $220. This is the amount by which the SSA will reduce the recipient’s annual $12,000 benefit.

In the year that a recipient reaches full retirement age, the limit on earnings for the months before FRA is $51,960. And the amount of reduction is $1 for every $3 earned over the cap.

So, a person who reaches their FRA in November after earning $50,000 during the first 10 months of the year would have no reduction in benefits because the amount is under $51,960. But if that person earns $60,000 in the months before reaching FRA, that’s $8,040 above the cap of $51,960 — and $8,040 divided by 3 gives $2,680 as the amount by which the recipient’s benefits for the first 10 months of the year would be reduced.

Starting with the month FRA is reached, there is no cap on what a recipient can earn. So the recipient in the above example would receive full benefits beginning in November, no matter how much he or she earns.

Income Sources

Not all income is equal when it comes to the Social Security earnings cap. Generally, any income that comes from employment counts against the earnings cap. Here are examples of the kinds of income that count against the cap:

• Wages and salary paid by an employer
• Net income from self-employment
• Bonuses
• Commissions
• Vacation pay

Income from sources other than working is not included. Some of the income sources that don’t affect Social Security benefits include:

• Dividends
• Interest
• Capital gains
• Rental income
• Pensions
• Annuities
• Military and government retirement benefits
• IRA distributions
• Inheritances
• Lawsuit settlements

Note that income earned before starting to receive Social Security does not count either. This could include stock options, back pay, bonuses and payments for unused vacation or sick leave.

Even if these payments arrive after starting to receive benefits, they aren’t included against the cap as long as they were earned before benefits started.

More on Earning Income While Getting Benefits

If benefits get reduced because a Social Security recipient not yet at full retirement age earns more than the cap amount, the money isn’t actually lost. It’s only delayed. After the recipient reaches FRA, Social Security will recalculate their benefit. The new benefit will be higher to make up for payments that were withheld because of excess earnings.

Sometimes, earning money while receiving Social Security can also increase your benefit amount. This can happen if, during a year you receive Social Security benefits, you earn enough money to make the year one of your highest-earning years. Social Security calculates benefits based on a worker’s highest-earning years. So adding a new high level to your earnings record could cause your benefit to increase.

There are different rules for people getting Social Security disability or Supplemental Security Income benefits. These people have to report all earnings to Social Security. In addition, people who earn money for working outside the U.S. are treated differently.

Keep in mind that Social Security uses an estimate for earnings during the coming year when calculating benefits. Recipients are expected to provide an earnings estimate to help the agency calculate benefits. If it appears that earnings will be different from the estimate, recipients are supposed to inform Social Security as soon as possible.

Bottom Line

Social Security recipients who have reached full retirement age can earn as much as they want from any source without it affecting their benefits. However, those who start taking benefits before reaching FRA may have their benefits reduced if they earn above a certain amount. Some types of income don’t count against the cap. These include dividends, interest and capital gains from investments, as well as pensions, annuities and some other sources.

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