Retirement
Social Security Earnings Test: The Hidden Cost of Working While Claiming Early
Social Security Earnings Test: The Hidden Cost of Working While Claiming Early
CORE INSIGHTS
- The Limit (2025): If you claim Social Security before Full Retirement Age (FRA) and work, you are subject to the Earnings Test. The 2025 limit is $23,400.
- The Penalty: For every $2 you earn above this limit, the SSA withholds $1 of your benefits. This often comes as a shock when checks stop arriving.
- The Refund: The withheld money is not lost. At FRA, your benefit is recalculated to pay it back. It’s a forced deferral, not a tax.
Many early retirees take a side gig only to find their Social Security checks stopped. This is the Retirement Earnings Test (RET). While annoying, it is not a tax—it is a temporary withholding that you get back later.
What-If Scenario: The $50k Side Hustle (2025)
| Component | Calculation | Amount |
|---|---|---|
| Excess Earnings | $50,000 – $23,400 | $26,600 |
| Withholding | $26,600 / 2 | $13,300 |
| Benefit Impact | ($20k Annual Benefit) | 0 Checks for ~8 Months |
Visualizing the Withholding Impact
*Figure 1: Benefit Reduction. Income above the Green Line triggers the Red Withholding.*
Strategic Action Steps
1
Forecast Annual Wages
Before claiming early (62-66), estimate W-2 income. If >$23.4k, reconsider claiming. The withholding might negate the cash flow benefit.
Before claiming early (62-66), estimate W-2 income. If >$23.4k, reconsider claiming. The withholding might negate the cash flow benefit.
2
Manage “Income” Definition
Only W-2 and Self-Employment income counts. Dividends, Interest, Pensions, and Capital Gains are exempt. You can make $1M in stocks and keep full benefits.
Only W-2 and Self-Employment income counts. Dividends, Interest, Pensions, and Capital Gains are exempt. You can make $1M in stocks and keep full benefits.
3
Use the “Grace Year”
In your first retirement year, the SSA uses a monthly test ($1,950/mo). You can retire in July earning $100k prior, and still get checks Aug-Dec.
In your first retirement year, the SSA uses a monthly test ($1,950/mo). You can retire in July earning $100k prior, and still get checks Aug-Dec.
The Bottom Line: Who Should Choose What?
- Delay Claiming: If you plan to work and earn >$23.4k. Let your benefit grow 8% instead of having it withheld.
- Claim Early: If your income is passive (investments) or wages are below the $23,400 threshold.
Frequently Asked Questions
How much can I earn while on Social Security?
If under FRA, the 2025 limit is $23,400. Earn more, and $1 is withheld for every $2 earned.
Is the withheld money lost forever?
No. It is recalculated at FRA. Your monthly check will permanently increase to pay back the withheld amount.
What counts as ‘Earnings’?
Only gross wages or net self-employment income. Investments, pensions, and annuities do NOT count.
Disclaimer: This content is for informational purposes only. Consult the SSA or a planner.