The typical Social Security scenario is simple: A beneficiary stops working and begins taking the full benefits to which he or she is entitled. But when a Social Security recipient is also drawing work income, things get a little more complicated. Work income may reduce the size of your Social Security check.

Let’s look specifically at situations involving wages or earnings from self employment. For this article, we’re addressing only work-related income – not income from passive sources such as interest, dividends, annuities, capital gains or other pension payments.

Most retirees will fall under the rules laid out in the Social Security Administration’s “annual earnings test:”

1. If you are full retirement age or older, you can earn unlimited income from work, with no impact on your Social Security payments. For most folks filing now, full retirement age is 66. This is a huge advantage to today’s workers. Under an older set of rules, earnings were counted against Social Security payments until age 70. But now, the cap on work comes off at age 66.

2. In the year a beneficiary reaches full retirement age, a special earnings limit applies, but only for the months prior to the person’s birth month. If a hypothetical beneficiary turned 66 on June 10 of this year, only earnings through May are considered. If the gross earnings for that period were $41,880 or less, the Social Security Administration will not impose any payment reduction for the year. Even though $41,880 is a fairly significant amount of earnings, the SSA will consider the worker to be retired for the entire year, and pay benefits for all 12 months.

Now let’s suppose our beneficiary earns more than the limit. For every $3 earned in excess of the limit, $1 of Social Security benefits is lost for the year. For example, if our worker earns $44,880 from January 1 through May 31, the worker is over the limit by $3,000 – but would only lose $1,000 of Social Security income for the year. That’s still a very generous outcome.

3. The third set of rules applies to those younger than full retirement age, and is much more restrictive. The rules do allow retirees to do some limited, part-time, seasonal or temporary work and still keep most of their payments. For these years, $1 of Social Security benefits is withheld for every $2 of gross earnings over $15,720. So a retiree who grosses $18,720 in 2015, for example, would be over the limit by $3,000 and would consequently lose $1,500 in benefits for the year.

Now that we’ve discussed the impact of work income on your benefits, let’s look at another way to minimize the effects of work income received prior to your full retirement age. The Social Security Administration makes an allowance for high-earning workers who retire or stop work during their full-retirement-age year. Regardless of their total yearly earnings, if earnings in your year of retirement are below the following, you can be paid for low- or non-work months:

  • In any year prior to your full-retirement-age year, any month in which your earnings are below $1,310 can be a Social Security benefit payment month.
  • In the year of your full retirement age, any month in which earnings are below $3,490 can be a payment month.

A word of caution about this test: It can only be used once – usually in the year you apply for payments. After using this option, later benefits can only be paid based on annual gross earnings.

There are many myths about the annual earnings test. One is that any money withheld due to high earnings will be paid at a later time. This is false. If, for example, you file for benefits at age 62 and all of your payments are withheld due to your high work income, you will never receive those monies.

Please note that this discussion only addresses work for retirees, survivors and non-disabled beneficiaries. Disability or Supplemental Security Income recipients have very different rules and impacts when they receive work income while claiming benefits.

Social Security is an important, but often complex, benefit for retirees. If you need help navigating your Social Security claiming strategy, we may be able to help. At Intelligent Capitalworks, that’s just part of what we do.