How The Social Security Earnings Test Works

Before you apply for early benefits from Social Security

, you'll need to answer a few questions, which include your future work plans, if any, and how much you're expecting to make if you do return to the workforce - this will help identify how much of a dent the Social Security earnings test will make on your finances, or if your payouts will be canceled.

This year, the earnings test will apply only if you make an annual salary that goes beyond $14,160. For every couple of dollars you make in excess of that amount, you'll lose a dollar in benefits. For example, if you've filed for early distribution at 62 with monthly benefits at $1,500 (on a yearly income estimate of $30,000), you'll lose $7,920 in Social Security benefits because you're $15,840 over the said amount. Keep in mind that the limits only include money from job wages or self-employed income, and pension benefits, investment profits, or money withdrawn from individual retirement accounts are excluded from the calculation.

Social Security administrators won't pare down your payouts proportionally - your benefits will be cancelled until the requirements are satisfied. With the above example, you won't receive any benefits for a five-month period, and your sixth-month benefit will amount to $1,080 after subtracting the $420 the earnings test claims.

In the first year of claiming benefits, the test virtually ignores the money made before you applied, and then balances out your benefits based on your monthly paychecks for the remainder of the year. The year you reach the normal age of retirement, you'll need to go through a relatively lenient test, wherein you'll have to give up a dollar in benefits for every three you make over $37,680 before the actual birthday. At the month of the birthday you've reached normal retirement age, you won't have to undergo the earnings test - you'll be free to make as much money as you want, without having to suffer losses in benefits.

by: Carina Smith

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