What is the Earnings Test?
In our discussions with farmers many state that they plan on signing up for social security at age 62 since they don’t trust it to be around for all of their lifetime. However, if they sign up for social security before their normal retirement age (NRA) which ranges between age 66 and age 67, you are subject to an earnings test. If you are born after 1959, the NRA is now age 67.
If your earnings exceed an annual allowance ($18,960 in 2021), then your benefits will be reduced by $1 for every $2 that exceeds that allowance. As an example, assume you generate earnings of $25,000 in 2021. The excess is $6,040. Your benefits will be reduced by $3,020. If you let the Social Security Administration know this up front, they may adjust your monthly benefits to reflect this. Otherwise, once they match up your earnings history, they will reduce or eliminate your benefits until it is fully paid.
Earnings are only from wages and self-employment earnings reported to the Social Security Administration. It does not include any other income items such as rents, interest, dividends, pensions, annuities, etc.
If your spouse is collecting a spousal benefit on your record, their benefits will reduce on a pro-rata basis. For example, assume in our previous example that Joe is collecting $2,000 per month and his spouse Jill is collecting $1,000. His benefit will be reduced by 67% or $2,013 and hers will be reduced by the remainder of $1,007.
Since you started to collect before NRA, your monthly benefit is reduced by 5/9% each month. If you start at age 62 and you are born after 1959, then your monthly benefit is reduced by 35%. But what happens if you make too much money from age 62-67 and have to pay all of your benefits back to SS. In this case, they will re-adjust your monthly benefit at your NRA to reflect your full NRA amount and you will not be penalized for having to pay back all of your early retirement benefits. However, it will probably take you about 13 years to break-even.
There is a special rule for the year you turn NRA. In that case, your allowance is $50,250 and you only pay back $1 for every $3 that you exceed the allowance and once you reach your NRA, you can earn unlimited amounts.
Also, in the year that you retire, you can elect to determine the allowance on a monthly basis instead of an annual basis. This allows you to earn much higher amounts before you retire and then keep your monthly earnings under the monthly allowance. As an example, assume Joe earns $50,000 in January to April, then retires in May and continues to earn exactly $1,500 per month from his son’s S farm corporation. The monthly allowance is $1,580 and his salary is under this number and none of his monthly SS benefits need to be paid back.
If you plan on retiring early on SS, it is important to understand the earnings test.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
Are wages paid in commodities considered earnings for this test even though they are not subject to self-employment tax?