Social Security only covers earned income, your wages, or your net income from self-employment. Your wages are covered by Social Security if money was deducted for “Social Security” or “FICA.” This indicates that you are contributing to the Social Security system, which safeguards your retirement, disability, benefits for survivors, and Medicare.
Annuities, pension payments, and interest or dividends from investments and savings are not considered earnings for Social Security purposes. Income taxes may be due, but Social Security taxes are not.
Navigating the intricacies of Social Security can be daunting, especially when it comes to understanding what income is counted towards the earnings limit. Worry not, as this comprehensive guide will shed light on the various types of income that are exempt from the earnings test, ensuring you maximize your benefits and enjoy a secure retirement.
Earnings Test: A Brief Overview
The Social Security earnings test applies to individuals receiving Social Security benefits before reaching full retirement age (FRA), currently 67 for those born in 1960 or later. This test limits the amount of money you can earn while still receiving full benefits. For 2023, the annual earnings limit is $21,240, and for each $2 you earn over this limit, $1 will be withheld from your benefits. However, upon reaching FRA, the earnings test no longer applies, allowing you to earn without any reduction in benefits.
Income Exempt from the Earnings Test
Fortunately, not all income is subject to the earnings test. The following types of income are excluded from the calculation of earnings:
1. Income Earned After Reaching FRA:
Once you reach your FRA, any income you earn, regardless of the source, will not affect your Social Security benefits. This means you can work full-time, start a business, or pursue any income-generating activity without worrying about reductions in your benefits.
2. Self-Employment Income Received After Entitlement to Benefits:
If you are self-employed and become entitled to Social Security benefits, any income you earn from self-employment after that point is exempt from the earnings test. This exemption applies even if the income is attributable to services performed before you became entitled to benefits.
3. Damages, Attorney’s Fees, and Certain Court-Ordered Payments:
Damages, attorney’s fees, interest, or penalties awarded by a court or received through a settlement with an employer based on a wage claim are excluded from the earnings test. However, back pay recovered in a wage claim does count towards the earnings limit.
4. Payments for Release of Employment Contract:
Payments received for releasing an unexpired employment contract are not considered earnings for Social Security purposes.
5. Disability, Medical, and Death Benefits:
Payments received under certain plans or systems established for disability, medical, or hospitalization expenses, or death benefits, are exempt from the earnings test.
6. Income from Exempt Trusts and Annuities:
Income from certain trusts and annuities that are exempt from income tax is also excluded from the earnings test.
7. Pensions and Retirement Pay:
Pensions and retirement pay, regardless of the source, are not counted towards the earnings limit.
8. Sick Pay Paid More Than Six Months After Last Employment:
Sick pay received more than six months after the month you last worked is exempt from the earnings test.
9. In-Kind Payments for Domestic Service:
In-kind payments for domestic services performed in the employer’s private home, such as agricultural labor, work not related to the employer’s business, or the value of meals and lodging provided under certain conditions, are not considered earnings for Social Security purposes.
10. Rental Income from Real Estate:
Rental income from real estate that cannot be counted towards self-employment income is excluded from the earnings test. This typically applies when the beneficiary did not materially participate in production work on the farm, was not a real estate dealer, and so on.
11. Interest and Dividends:
Interest and dividends from stocks and bonds are generally excluded from the earnings test, unless they are received by a dealer in securities in the course of business.
12. Capital Gains and Losses:
Gains or losses from the sale of capital assets, or the sale, exchange, or conversion of other property that is not considered inventory, are not counted towards the earnings limit.
13. Net Operating Loss Carry-Over:
Net operating loss carry-over resulting from self-employment activities is excluded from the earnings test.
14. Employee Loans Repaid by Work:
Loans received by employees that are repaid through their work are not considered earnings for Social Security purposes.
15. Workers’ Compensation and Unemployment Benefits:
Workers’ compensation, unemployment compensation, and strike benefits are excluded from the earnings test.
16. Veterans’ Training Pay or Allowance:
Pay or allowances received by veterans for training or education are not counted towards the earnings limit.
17. Jury Duty Pay:
Payments received for jury duty are excluded from the earnings test.
18. Achievement Awards and Contest Winnings:
Awards received for achievements, length of service, hobbies, or prize winnings from contests are not counted towards the earnings limit, unless the person enters contests as a trade or business.
19. Tips Under $20 or Not Paid in Cash:
Tips paid to an employee that are less than $20 a month or are not paid in cash are excluded from the earnings test.
20. Travel Expense Reimbursements:
Payments by an employer that are specifically for travel expenses of the employee and are identified as such at the time of payment are not considered earnings for Social Security purposes.
21. Moving Expense Reimbursements:
Payments to an employee as reimbursement or allowance for moving expenses, if they are not counted as wages for Social Security purposes, are excluded from the earnings test.
22. Royalties Received After FRA:
Royalties received in or after the year a person turns FRA are excluded from the earnings test. However, these royalties must flow from property created by the person’s own efforts that he or she copyrighted or patented before the taxable year in which he or she turned FRA.
23. Retirement Payments to Retired Partners:
Retirement payments received by a retired partner from a partnership, provided certain conditions are met, are excluded from the earnings test.
24. Payments from Employer-Sponsored Plans:
Certain payments or series of payments made by an employer to an employee or an employee’s dependents on or after the employment relationship has ended due to death, retirement for disability, or retirement for age are excluded from the earnings test. These payments must be made under a plan established by the employer.
25. Payments from Individual Retirement Accounts (IRAs) and Keogh Plans:
Payments from Individual Retirement Accounts (IRAs) and Keogh Plans are excluded from the earnings test.
Additional Exclusions
In addition to the income types listed above, the Social Security Administration (SSA) may exclude other income based on other federal laws or specific circumstances. It’s always advisable to consult the SSA website or contact a Social Security representative for the most up-to-date information on income exclusions.
Understanding what income is not counted against Social Security can help you maximize your benefits and plan for a financially secure retirement. By carefully reviewing the various exclusions and consulting with the SSA, you can ensure that your hard-earned income is not inadvertently reducing your benefits. Remember, the earnings test only applies before reaching FRA, and once you reach that milestone, you can enjoy your full benefits regardless of your income.
Annuities, pension payments, and interest or dividends from investments and savings are not considered earnings for Social Security purposes. Income taxes may be due, but Social Security taxes are not.
Social Security only covers earned income, your wages, or your net income from self-employment. Your wages are covered by Social Security if money was deducted for “Social Security” or “FICA.” This indicates that you are contributing to the Social Security system, which safeguards your retirement, disability, benefits for survivors, and Medicare.
(9) Any interest accrued on funds designated for burial that are not included in the separate burial fund, as well as any increase in the value of an excluded burial arrangement that is allowed to build up. (See § 416. 1231 for an explanation of the exclusion of burial assets. ) Beginning on November 1, 1982, or, if later, the date you first become eligible for SSI benefits, interest earned on burial funds or appreciation in the value of excluded burial arrangements, is excluded from income;
(22) Income from interest and dividends from resources that are countable or that are excluded by federal statutes other than the Social Security Act’s section 1613(a); and
(24) Any annuity that a state pays to an individual or to their spouse in accordance with the state’s assessment that the individual is:
(4) Food that you or your partner raises and that you or your household eats;
(17) Amounts paid to you from a State-established fund to assist victims of crime;
Social Security Income Limit: What Counts As Income?
FAQ
What income does not affect Social Security benefits?
What income is excluded from Social Security?
What income is not counted?
How much social security if you earn over the income limit?
For every $3 you earn over the income limit, Social Security will withhold $1 in benefits. At your full retirement age, there is no income limit. The $21,240 amount is the number for 2023, but the dollar amount of the income limit will increase on an annual basis going forward. You need to keep up with the year-to-year changes to stay informed.
Does income count towards SSI limits?
Some of what you make or own won’t count toward SSI limits. For SSI, income is money you get, such as wages, Social Security benefits, and pensions. Income can also include food and housing. Resources are things you own that have value, such as a second vehicle or money in a bank account.
What income does not count against the Social Security cap?
Some types of income don’t count against the cap. Those include dividends, interest and capital gains from investments, as well as pensions, annuities and some other sources. The post What Income Reduces Social Security Benefits? appeared first on SmartAsset Blog.
Which income sources do not count for Social Security benefits?
Income from sources other than working is not included. Some of the income sources that don’t affect Social Security benefits include: Note that income earned before starting to receive Social Security does not count either. This could include stock options, back pay, bonuses and payments for unused vacation or sick leave.