Can you work and collect Social Security? The simple answer is yes you can, but you may not want to. There are two reasons to wait to apply for benefits if you plan to continue to work—penalties and taxes.
Your age and how much you expect to earn will help you decide.
If you have not reached your Full Retirement Age (FRA), you are subject to the earnings test. This means there is a limit to how much you can earn without a penalty.
What Is Your Full Retirement Age?
To start you need to know that your FRA is the age Social Security deems you eligible for your full Social Security benefit. It is the center point for determining the amount of your monthly payment. If you begin collecting benefits before FRA, your payment amount will be reduced. If you apply after FRA, your payment will be increased.
Full Retirement Age used to be 65 for everyone, but now it depends on the year you were born.
If you were born between 1943 and 1954 your Full Retirement Age is 66. It increases as follows:
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
If you begin collecting benefits before your FRA, there is an earnings limit of $15,720. You can work, but anything over that amount is subject to a penalty. You will be required to pay $1 for every $2 you earn. That is half of anything you make over the $15,720 limit. For example, if you bring in $30,720 in a given year, that’s $15,000 over the limit. The penalty will be $1 for every $2 you earn or $7,500. The average monthly Social Security payment is $1,300. It would take nearly six months of payments to satisfy that amount.
This money is not immediately taken out of your paycheck, but once reported, you will be expected to pay the penalty in full or your entire monthly Social Security payment will be withheld until the fine is fully paid.
Technically, you are supposed to report anticipated income to Social Security so that they can withhold penalty amounts from your Social Security payments as they are acquired. However, should you lose your job or decide to quit, it is difficult to get payments reinstated quickly. Stopping and starting payments can be confusing to you and the Social Security Administration. This is where many mistakes occur, and it may be difficult to get them straightened out. It is easier to keep collecting payments and be prepared to pay the penalty when notified. Social Security does not charge interest.
Every year your income is reported to Social Security by the IRS after you file your tax return. It may be several months after it is reported before Social Security notifies you of the overpayment and asks for it to be paid back. This is something you need to plan for as the amount due may be significant and if you cannot pay it, several months of your benefit may be withheld. If you continue to earn more than the limit, your payments may be suspended for years.
The Year of Your Full Retirement Age
In the year of your FRA, the earnings limit is higher and the penalty is lower than previous years. From the first of the year until the month you reach your FRA the limit is $41,880. If you exceed that amount, you will incur a penalty of $1 for every $3 you earn.
Once you reach the month of your FRA, there is no limit to how much you can earn. There is no longer an earnings test or penalty. You can keep all the funds you make from this point forward.
You will be reimbursed for payments missed because of the earnings limit. Once you reach FRA your benefits will be recalculated to include the months your payments were suspended, and your monthly payment amount will be increased accordingly. But it is paid in small increments and may take 15 years to recoup the missed funds.
The U.S. Government considers Social Security benefits income, and therefore it may be taxed. If your combined income—adjusted gross income, tax exempt interest income and half of your Social Security benefit—is over $25,000 for an individual and $34,000 for a couple, up to 85% of your benefit may be subject to Federal tax. Social Security provides a benefit planner to help you determine if you need to pay tax on your payment.
In addition to federal tax 13 states tax Social Security benefits—Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia. Each state has its own tax rate. This may be a factor when deciding where to live later in life.
So, you can work and collect Social Security benefits at the same time. You will want to consider all the facts before you do. If you have not reached your FRA, you may pay stiff penalties. If you have a high income, your Social Security benefit may be subject to Federal and State tax. Only you can decide if with your individual circumstances, working is right for you.