What Type of Income Reduces Social Security Benefits?
Earning a paycheck while receiving early Social Security can lead to a temporary benefit reduction, but this amount is added back to your payments later on.
For those collecting Social Security benefits while still working, certain income can trigger a temporary reduction in monthly payments. This rule applies specifically to individuals who claim benefits before reaching their full retirement age. The Social Security Administration has specific guidelines that define what counts as income for this purpose, known as the earnings test.
The Social Security Earnings Test
The Social Security earnings test is a rule the Social Security Administration (SSA) uses to determine if your benefits should be reduced based on your work-related income. This test is exclusively for individuals who have started receiving retirement or survivor benefits but have not yet reached their full retirement age (FRA). Your FRA is based on your birth year, falling between age 66 and 67 for most individuals retiring now.
The earnings test is not a permanent reduction of your lifetime benefits, but a temporary withholding of payments. Once you reach your FRA, the test no longer applies, and you can earn any amount from work without a reduction in your Social Security payments.
Income Included in the Earnings Calculation
The earnings test is concerned only with income you earn from working. The two primary categories are gross wages from employment and net earnings from self-employment. For those who work for an employer, the SSA looks at your gross wages, which is your total pay before any deductions for taxes, health insurance, or retirement contributions. This includes your regular salary, bonuses, commissions, and paid time off like vacation or sick pay.
If you are self-employed, the calculation is based on your net earnings. This is your gross income from your business minus allowable business expenses as defined by the IRS. If you have both a job and a side business, the SSA will consider your gross wages plus your net self-employment earnings.
Income Excluded from the Earnings Calculation
A significant amount of income you might receive does not count toward the earnings test limit. The SSA specifically excludes income from sources other than active employment, so money from savings and investments will not trigger a benefit reduction. The following types of income are exempt from the earnings test:
- Pensions and annuities
- Distributions from retirement accounts like 401(k)s or IRAs
- Interest earned on savings accounts or bonds
- Dividends from stocks
- Capital gains realized from selling assets
- Rental income from real estate
- Inheritances
- Other government benefits, such as those from the Department of Veterans Affairs
Annual Limits and Benefit Reduction Formulas
The SSA sets specific earnings limits each year, which are subject to inflation adjustments. For 2025, there are two different limits and formulas depending on your age. If you are receiving benefits and will be under your full retirement age for the entire year, the annual earnings limit is $23,400. For every $2 you earn above this amount, the SSA will withhold $1 from your benefits.
A more generous rule applies for the year in which you will reach your FRA. In 2025, the earnings limit for this period is $62,160. This higher limit applies only to the earnings you make in the months leading up to the month you reach FRA. During this time, the SSA withholds $1 in benefits for every $3 you earn above this higher threshold.
Benefit Recalculation at Full Retirement Age
Many people worry that benefits withheld due to the earnings test are lost forever, but this is not the case as the reduction is only temporary. When you reach your full retirement age, the Social Security Administration performs a recalculation of your monthly benefit amount. This adjustment gives you credit for the months in which your benefits were withheld.
This recalculation effectively increases your monthly benefit payment for the rest of your life, and the process is automatic. The SSA adjusts your benefit upward to account for the withheld amounts, ensuring that over your lifetime, you are compensated for the temporary reductions.