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Imagine getting a note like this:
I’m 63. I started Social Security last year because money was tight. Now an old friend has offered me a part-time job paying about $40,000 a year. Someone told me Social Security will take my checks away if I accept the job. Did I make a huge mistake?
Let’s call her Gail. The rule she’s worried about is very real — and on Oct. 14, Social Security announced the new numbers for 2027. (1)
I’ve been a CPA since 1981, and here’s my short answer for Gail: Take the job, but know the rule first.
It’s called the retirement earnings test. If you’re younger than full retirement age for all of 2027, Social Security’s 2027 fact sheet puts the limit at $25,560 a year. (1)
Earn more than that, and “One dollar in benefits will be withheld for every $2 in earnings above the limit.” (1)
The good news: Social Security says benefits withheld because you’re working “are not lost.” (2) And only certain income counts. (3)
For anyone born in 1960 or later, full retirement age is 67. (4) Here are five things Gail — and anyone working while collecting early — needs to know.
1. The 2027 limit is $25,560, and the math is $1 for every $2
Let’s run Gail’s numbers. She’d earn $40,000 in 2027, which is $14,440 over the $25,560 limit.
Half of that excess is $7,220. That’s how much Social Security would hold back. (1) If her benefit is $1,500 a month, that’s nearly five months of checks.
It’s a real hit to cash flow. But notice what it isn’t: It isn’t a penalty that takes her entire benefit.
If you’d rather stay under the limit, a part-time or flexible job may be the sweet spot.
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2. The limit jumps in the year you reach full retirement age
The rules loosen as you get closer. For the year you reach full retirement age, the 2027 limit is $67,920. (1)
In that year, Social Security withholds $1 for every $3 above the limit, and it counts only earnings for the months before you reach full retirement age. (1)
Once you reach full retirement age, the limit no longer applies. Social Security says that if you work and are at full retirement age or older, “you may keep all of your benefits, no matter how much you earn.” (3)
3. Only paychecks count, not your savings
This part matters. If you work for someone else, “only your wages count toward Social Security’s earnings limits,” according to Social Security. If you’re self-employed, it counts only your net earnings from self-employment. (3)
The agency says it doesn’t count income such as “other government benefits, investment earnings, interest,” pensions, annuities or capital gains. (3)
So a big year in the stock market won’t shrink Gail’s check. A big paycheck might.
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4. The withheld money isn’t gone — it comes back later
Here’s the part many people miss. Social Security says, “Benefits withheld while you continue to work are not lost; they are added to your monthly benefit once you reach FRA.” (2)
Its earnings guide puts it this way: “Your benefit will increase at full retirement age to account for benefits withheld due to earlier earnings.” (3)
In my view, that makes the earnings test more of a delay than a fine. The catch is that you have to live on less in the meantime.
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5. Two escape hatches: the first-year rule and the do-over
There’s a special rule for the year you retire. Let’s say you earn $50,000 from January through June 2027, then quit working in July. You’re way over the $25,560 annual limit — but Social Security doesn’t penalize you for it.
In your first year of retirement, it looks at each month separately. It says “you can get a full Social Security check for any whole month you’re retired, regardless of your yearly earnings.” (3) For 2027, a month counts as retired if you earn $2,130 or less and you’re under full retirement age all year. (1)
So in our example, you’d get full checks from July through December.
There’s also a do-over. Social Security lets you “Cancel or withdraw your application up to 12 months after your benefit approval.” (5)
But you’ll have to repay what you and your family received, plus money withheld for things like Medicare premiums and taxes. And “You can only cancel your application once,” though you can reapply later. (5)
Whatever you decide, tell Social Security right away if your expected earnings change. (3) That can help you avoid an overpayment notice later.
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My honest take
Gail didn’t make a huge mistake. She made a decision without knowing one rule — and now she does.
If the job is good and the paycheck is bigger than what gets withheld, working usually wins. And the money held back today comes back as a bigger check later.
Working longer is rarely the mistake. Not knowing the rules is.
Sources: 1. Social Security Administration; 2. Social Security Administration; 3. Social Security Administration; 4. Social Security Administration; 5. Social Security Administration
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