Section 801 - The Earnings Test in General
All beneficiaries, except those whose benefits are based on disability or are over full retirement age, are subject to a loss of benefits if their earnings exceed certain limits. The way your earnings affect benefits is called the Work Test, the Retirement Test, or the Earnings Test. They are all the same. Although disabled workers are not affected by the work test, their spouses and children who receive benefits on their accounts are subject to it. The effect of a disabled beneficiary’s earnings are discussed in §504.
If your yearly earnings are below certain annual limits, there is no effect on benefits. If they are over the annual limit, you lose one dollar in benefits for every two dollars over the limit, except for the year you reach full retirement age. In that year, you lose one benefit dollar for every three earned dollars over the limit. There are other advantages that apply in that year. The limits are significantly higher, and only earnings for months in that year before the month you attain full retirement age are counted. Whether or not you are in the year you reach full retirement age, there is also a monthly limit rule which applies, but usually for only one year, see §804. The earnings limits for different years are listed in Appendix 7.
The earnings of a retired worker affect all dependents receiving benefits on his or her account, with the exception of a divorced spouse (see §204.3). However, if the worker first becomes entitled to benefits in or after the month the divorce is final, then the worker's earnings will affect the ex-spouse's benefits, but only for two years. A dependent’s earnings will not affect the worker or any other dependent on the same account. Likewise, the earnings of a person receiving survivor benefits will not affect anyone else on that account.
Only earned income is considered for these purposes (§805). Income such as dividends or interest is not included, see §806. All earnings for the year are counted, even your earnings before you become eligible for benefits or after your entitlement ends, but for the year you reach full retirement age, only earnings before the month you reach full retirement age are counted. See §807 and §808 for special rules.
If you have a short taxable year, such as occurs when you switch from a calendar to a fiscal year, the annual earnings limit is prorated in the same way as the year of death (§810).
Section 802.1 - Earnings Limit - Under Full
If you will not reach full retirement age during the year, you lose one dollar of benefits of every two dollars over the annual limit for that year. All earnings for the year are included, even those earned before your eligibility for benefits. Earnings limits are listed in Appendix 7. Note that you may receive benefits for any month your earnings are less than the monthly limit (Section 804), usually for only one year.
To determine the amount of benefits which must be withheld, subtract the yearly limit from your annual earnings and divide the remainder by two.
Section 802.2 - Earnings Limit Year of
Attainment of Full Retirement
If you reach full retirement age at any time during the year, you lose one dollar in benefits for every three dollars over the annual limit (Appendix 7). Only earnings for months in the year before the month of attainment of full retirement age are included, even those earned before your eligibility for benefits. Note that you may receive benefits for any month your earnings are less than the monthly limit (Section 804), but usually you may take advantage of this for only one year.
To determine the amount of benefits which must be withheld, subtract the yearly limit from your countable earnings, and divide the remainder by three.
Section 802.3 - Earnings Limit After
Full Retirement Age
Beginning with the month you reach full retirement age, you can earn as much as you like and still collect all your Social Security benefits. The earnings limits no longer apply. If you are an employee, only the amount of money you earn through the month before the month of full retirement age will count. For example, if you reach full retirement age in July, only your earnings from January 1st through June 30th are included for the work test. You should not report your earnings from July 1 on. If you are self-employed, divide your annual earnings by 12 and then multiply the answer by the number of months before the month of full retirement age.
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Section 803 - How Earnings Are Charged
Against Monthly Benefits
Whenever you earn over the yearly exempt amount, Social Security will withhold the required amount (Section 801) of Social Security benefits beginning with the earliest month of entitlement. Social Security will withhold full monthly benefits until the entire amount that has to be withheld for the year is withheld (see Section 806 for exceptions). They do not prorate the withholding over the course of the year, (unless you request this - see below) they withhold all benefits beginning with the first month of eligibility, until the full required amount has been withheld.
For example, Harold is entitled to $900 a month from Social Security. He expects to have excess earnings requiring $2,000 to be withheld from his Social Security benefits. Social Security will withhold his entire checks for January and February. They will withhold $200 for March, and pay him $700 for that month. He will receive his full $900 benefit for the months of April through December. All the withholding is done before any benefits are paid to him.
If one or more dependents receive benefits on your account, any partial payment is allocated to each beneficiary proportionate to his share of the total family benefits.
Using the above example, assume Harold has a wife Beatrice who is entitled to $450 a month on Harolds account. The $2,000 to be withheld would be withheld as follows: January - Harold, $900; Beatrice $450 February - Beatrice, $216, Harold, $434. Both would receive full checks for March through December.
If Beatrice had excess earnings instead of Harold, only her benefits would be withheld. A dependents earnings will never require withholding of the workers or another dependents benefits. Likewise, the excess earnings of a survivor will not affect another survivors benefits.
Excess earnings are not carried over to another year. Only the benefits payable in the year of the earnings are subject to withholding. See Section806 regarding the monthly earnings test.
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Section 803.1 - Pro-Rating
Although Social Security procedures usually require full withholding of benefits until all required benefits are withheld, you may request that the withholding of benefits be pro-rated over the course of the year. Instead of receiving no benefits for the normal withholding period and then full benefits, you may choose to receive partial benefits.
In the example above, the $2,000.00 to be withheld could be spread over 12 months, deducted from each months benefits instead of waiting until March to receive any benefits. If the period for pro-rating does not extend into the following year, your written request for pro-rating will be granted. The amount payable (before Part B Medicare deductions) must be at least $25 per month. Pro-rating of work suspensions will not be granted if you have an existing overpayment (Section 1101).
Prorating may be extended up to June of the following year, but only if you claim that loss of benefits will cause a financial hardship, or require you to significantly revise your retirement plans, and there is no expectation of excess earnings for the next year. Social Security will ask you to explain this in
Section 804 - The Monthly Earnings Test
If your earnings for a year are over the applicable earnings limits, (Appendix 7) Social Security will determine the amount of benefits which must be withheld. for Appendix page. No benefits will be withheld from a "non-service" month, no matter how high the annual earnings may be. The way non-service months are determined is called the Monthly Earnings Test. Under this rule, you have a non-service month for any month after entitlement in which you earn under a certain amount, if you are an employee. If you are self-employed, the test is whether you render substantial services to your business. The monthly limits for employees vary depending on your age and the year involved. Amounts are listed in Appendix 7.
If you are self-employed, the dollar limits do not apply. Instead, the "substantial services" rule is used. Generally, if you spend more than 45 hours per month at your business, your services are considered substantial. If you work less hours per month, the services are not substantial and you may have a non-service month. If your business is highly remunerative, such as a lawyer, doctor, consultant, etc. more than 15 hours per month is considered substantial.
You may be eligible for more than one non-service month in a year, but you are not eligible for non-service months in more than one year (with some exceptions to be discussed). The year in which you are eligible for non-service months is called a "grace year." It is the first year in which you have a non-service month. This is not necessarily the first year you are entitled to benefits.
Example: John turns 63 in 2007 and applies for benefits. Although he continues working and earns over the monthly amount in all months of 2007, some benefits are payable because the amount to be withheld based on his yearly earnings is less than the total of his benefits for the year (See §408 for a discussion of how this works). Because he has no non-service months in 2007 this is not a grace year. He has even higher earnings in 2008, enough to require withholding of all benefits. However, he earns under the monthly limit during the months of August and September. Because these are non-service months, he is paid his benefits for those months despite his annual earnings. 2008 is his grace year. He works in 2009 and again his earnings require withholding of all benefits. He has no earnings in July, August or September, but these benefits are withheld based on his annual earnings because he has already used his grace year.
There are two situations where certain beneficiaries are entitled to a second grace year. The first case applies to a child, a Young Wife/Husband (Section 204.2) or a Young Widow(er) (Section 204.7). These beneficiaries receive a second grace year for the year in which their entitlement terminates, unless the termination is due to death or change to another type of benefit with no break in entitlement.
The second case applies to any beneficiary who receives one type of benefit which terminates, but then becomes entitled to another type of benefit with at least a one month break entitlement. The first year with a non-service month during which the beneficiary is entitled to the second benefit is a grace year.
Section 805 - Income That Counts
Under the annual earnings test, your earnings are the sum of gross wages plus net earnings from self-employment, minus any net loss from self-employment.
Wages are counted even if they are not covered by Social Security tax (FICA). Bonuses and awards are counted if they were actually earned during the year. Advances against future commissions are counted if you are an employee.
Dividends and interest received by a dealer in stocks and securities are counted if produced by his inventory for resale. Profit-sharing payments from a plan which is not tax-exempt are included. Real estate dealers who hold property for resale must include rental income from such property.
Stock or bond options are wages at the time of payment, based on the
fair market value. If there is a substantial risk of forfeiture, for
example if the employee does not complete a required period of
service, then the options are counted as wages when the risk lapses.
If the options are exercised at a profit, then the gain is also counted
as wages at that time. This only applies if the options are not part
of a tax-deferred plan. Note that if the options are exercised after
the employment relationship terminates, the wages are counted as earned
in the last month of employment, see Section 807.
Royalties received from a copyright or patent obtained in or after the
year you turn 65 are counted for deduction purposes. However,
royalties received from such property obtained before the year you turn
65 are not counted beginning with the year you turn 65.
Sick pay received during the first six months after stopping work is included, as well as temporary disability insurance, unless you paid the premiums for it.
Travel and business expenses paid to an employee are counted, unless they are specifically identified as such at the time the payment is made. Vacation pay is counted, but if it is paid at or after the termination of employment and is attributable to a prior year, it may not be counted for the current years earnings.
Before 1984, payments of idle-time, standby, "subject to call" and other such payments for a non-work period after age 62 were not counted for the work test. Beginning January 1, 1984, these types of payments are included as earnings.
Section 806 - Income That Doesnt Count
Payments which do not represent wages or self-employment income are not included for purposes of the retirement test. You do not count such items as interest, dividends, capital gains, legal damages (unless they result from a legal action for wages), wages which are used to hire a substitute employee, payments to an established employer cafeteria benefits plan, rental income, income from a hobby, prizes and awards, royalties from a work personally created on which a patent or copyright was obtained before the year you turn 65 if the royalties are received in or after the year you turn 65, sick pay received more than six months from the last month you worked, unemployment benefits and workers compensation benefits.
Certain self-employment income may be excluded, see Section 808.
Although a particular payment may be considered wages for deduction purposes, if it is attributable to a time before your entitlement it may not affect your benefits. See the next section.
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Section 807 - When Earnings are Counted
Wages are counted as earnings for the year in which they were earned. It is presumed that wages paid in a year were earned in that year, unless you show otherwise. Self-employment income is earned when received (or accrued, for those on the accrual method), regardless of when the services were rendered.
Sometimes special payments are made at or near retirement, such as advances, back pay, bonuses, severance pay, accrued vacation pay, holiday pay and so forth. If these payments were earned in an earlier year, they are not included in the earnings test for the year of retirement. Likewise, the month in which such a payment is earned may be important for determining non-service months (Section 804).
If your employment has not ended, payments for sick pay, holiday pay, and vacation pay are earned at the time of your absence. Advances against commissions, payment in lieu of vacation and occasional bonuses are considered earned in the month of payment. If you can establish that they should be attributed to a different period, Social Security will do so. Back pay, regular bonuses and school teachers summer pay is considered earned in the month for which payment is made.
If the payment is made at the time of or after your employment terminates, the wages are considered earned as of the last month worked. However, if it is clear from a written plan that the payment relates to an earlier period, it will not be counted as earnings for the current period. For example, if you have accrued a months vacation which you could have taken in an earlier year, you do not include that as earnings for the retirement test when you are paid for that vacation time upon your retirement.
See the next section for a discussion of the self-employment income exclusion.
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Section 808 - Self-Employment Income and
Net losses from self-employment may be deducted from gross wages and other self-employment income for the year.
Example: Jim is a plumber. He earns $10,000.00 in wages. He also is self-employed in a plumbing business. He has $7,000.00 in net losses in his business. Only $3,000.00 is counted as earnings for the retirement test.
For purposes of the retirement test, you may exclude all self-employment income attributable to services rendered before your first month of entitlement, but received (or accrued for those who use that method) in a year after the first year of entitlement. For example, if your first month of entitlement is December, you may exclude from the next years earnings (for the retirement test only) that income which is attributable to services performed before December of your year of entitlement.
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Section 809 - Special Problems for Business
As a business owner, it is easy for you to reduce your salary when you reach retirement age to qualify for benefits even if you do not actually retire. Social Security has special procedures for retirement claims from people who own a business. They will not simply accept your word that your earnings are below the earnings limit.
Social Security will assume that your earnings are over the limit unless you can prove to their satisfaction that your actual services have been reduced.
If you have sold your business they will want to see the contract and other documents to make sure it is a bonafide transaction and not merely a sham solely designed to make you eligible for benefits without really retiring.
If you will continue in the business, they will want an explanation of why your income is reduced. Any reduction in income must correspond to a reduction in your services. Stopping or cutting your salary, without a reduction in your duties, is not sufficient. They will want to know who will assume your former duties, and what qualifications they have to do it.
Social Security will require you to give a signed statement detailing the nature of your business, your pre-retirement and post-retirement duties, the names and addresses of your major customers and suppliers, how many hours you will spend at the business and on what days, what kinds of payments you receive from the business and how much.
They will require you to submit your personal and business tax returns for the last two or three years, and any other records they believe important, depending on your type of business.
They will check up on the statements you give. They will call your suppliers and customers to see if you are still personally dealing with them. A Field Representative (Section105) may call at your place of business posing as a customer to see if you are there and if you are working. They will scrutinize your tax returns to see if you are overstating deductions or taking money out of the business in a disguised form.
Social Security does all this to prevent payment of retirement benefits to someone who has not really retired. If they decide that your retirement is questionable, they will not pay you.
Before you file for benefits, if you are not selling or closing your business, you must be prepared to explain, in full detail, why your earnings will be less, and who is taking over your duties. Expect them to confirm everything you tell them. Even if they start your checks, they may reevaluate your case in three months, six months or a year. If they do and then decide you were never really retired, they may claim that they overpaid you and require a refund.
A consultation with a lawyer with Social Security experience would be wise. You should do this before you go to the Social Security office. You are within your rights to intentionally restrict your earnings to qualify for benefits if you wish, but your earnings must be fairly related to your actual services.
Section 810 - Special Rule For the Year of
The full annual exempt amount is used in the year of death. SSA will use the full annual exempt amount for a beneficiary who dies in the year of reaching full retirement age even if he/she died before attaining full retirement age.
Section 811 - Work Outside the U.S.
If you are under age 70 and work in a foreign country for 45 hours in any one month your benefit is suspended for that month, unless the work is covered by U.S. social security tax. It doesnt matter how much your earnings are, even if the totals for the year or month are under the regular limits (Sections 801-802.3). Disability benefits are not subject to this rule. Benefits for any dependent on your account are also suspended, with three exceptions: a divorced spouse, divorced for at least 2 years; if the worker was deported, if the worker is an alien whose benefits are suspended due to the alien non-payment of benefits law. This law prohibits payments, including disability benefits, to aliens who reside out of the country for more than 6 months.