What Kind Of Income Counts As Earnings
The Social Security income limit applies only to gross wages and net earnings from self-employment. All other income is exempt, including pensions, interest, annuities, IRA distributions, and capital gains.
The term wages refers to your gross wages. This is the money that you earn before any deductions, including taxes, retirement contributions, or other deductions.
If you want to see a more in-depth conversation about what counts as income for the earnings limit, see my article on the Social Security Income Limit: What Counts as Income?
Social Security Wage Base Increases To $160200
The Social Security Administration has announced that the maximum earnings subject to Social Security tax will increase from $147,000 to $160,200 in 2023 . The maximum Social Security employer contribution will increase $818.40 in 2023.
For 2023, the FICA tax rate for both employers and employees is 7.65% .
For 2023, an employer must withhold:
Social Security and Supplemental Security Income benefits will increase by 8.7% in 2023. The average monthly Social Security benefit will increase from $1,681 to $1,827, and the maximum federal SSI monthly payment to an individual will increase from $841 to $914. The maximum federal SSI monthly payment to a couple will increase from $1,261 to $1,371 in 2023. The amount of earnings that is required in order to be credited with a quarter of Social Security coverage will increase from $1,510 to $1,640.
The SSA has a 2023 Fact Sheet on the changes.
For more information on the Social Security wage base, see Checkpoints Federal Tax Coordinator ¶A-6035.
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The Increased Maximum Social Security Benefit
Just as the average monthly Social Security payout will increase in 2023, so too will the maximum benefit. For 2022, the top payout was $4,194 but, in 2023, that will jump to $4,555.
One thing about the maximum Social Security benefit is that its all but unattainable for most Americans. For starters, youd have to wait until age 70 to file for benefits, and most retirees file at 67 or even as early as 62. But to get that top amount youll also need to earn at or above the Social Security wage base for the full 35 years that the SSA takes into consideration when calculating your benefit.
While thats certainly possible for those who consistently take home a very high paycheck, in reality, only about 6% of Americans exceed the Social Security wage base in any given year, let alone for 35 years.
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What If You Earn More Than The Limit
Earning more than the maximum allowable amount for the year will result in you losing disability benefits. However, losing the disability benefits might be temporary. Some disabled workers might earn more than the maximum for a month or two, but once their income returns to the lower level, the benefits will be reinstated.
The benefits exist to help disabled individuals financially while they aren’t able to perform tasks necessary to earn a living. Earning more than the limit indicates to the Social Security Administration that your disability doesn’t hinder your ability to earn an income anymore.
Social Security: 4 Steps To Claiming The Maximum Monthly Benefit
The maximum Social Security benefit for 2023 will rise to an impressive $4,555 per month for qualifying retirees. However, hardly any recipients will actually earn that lofty amount.
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In fact, the average Social Security benefit for 2023, which is much more attainable, is just $1,827 and thats after an 8.7% COLA lifted that amount from $1,681 in 2022. But, if you really want to earn the maximum benefit, there are really just three ways to do it. Here are the steps.
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How Do Social Security Claimants Know If They Have To Pay Tax
The SSA mails the statement every January and it summarizes how much you received in benefits the previous year.
If you have not received this form, or if you’ve misplaced it, you can request a new one using your online social security account.
Select the “replacement documents” tab and follow the instructions to order your new form.
If it turns out you do owe taxes on your benefits, you can opt to make quarterly estimated payments to the IRS, or you can choose to have federal taxes withheld when you initially apply for benefits.
You can choose to have either 7, 10, 12, or 22 percent of your monthly benefit withheld for taxes.
Keep These Numbers In Mind If You Work And Collect Social Security At The Same Time
Inflation has been driving up the cost of living for consumers of all ages. But seniors on Social Security may be having a harder time making ends meet. As such, a lot of older people have made the tough decision to return to work in some capacity.
The good news is that you are allowed to collect Social Security and also earn money from a job. And once you reach full retirement age , which is either 66, 67, or somewhere in between, depending on the year in which you were born, you can earn any amount of income without it impacting your Social Security benefits.
But if you’re working and collecting Social Security simultaneously before reaching FRA, you’ll risk having benefits withheld if your income exceeds what’s known as the earnings-test limit. The good news, though, is that the limit is increasing in 2023, which means you’ll get more leeway to bring home income from a job without worrying about losing out on Social Security.
Image source: Getty Images.
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What Happens When Your Nine
If you participate in the Trial Work Period Program , at some point you will use up your nine months of unlimited income while still receiving your full SSDI benefits. What then?
The Extended Period of Eligibility When you exhaust your nine TWP months, the SSA wants to give you the incentive to continue working if you can. The Extended Period of Eligibility is a 36-month period in which you have an income safety net.
Each month, the SSA checks your reported income to see if you exceeded the monthly income cap that is substantial gainful activity . If you do exceed the SGA level, you will continue to receive your full SSD benefit during a 3-month grace period. After that, your SSD benefit payment will be suspended for any month your income is above the SGA.
But, if during the 36-month safety net period your earnings again fall below the SGA level, your SSD benefit payments will resume for each such month.
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Higher Maximum Social Security Benefit
In 2022, just as the COLA rose by a significant amount, so too did the maximum possible Social Security benefit. Specifically, the 2022 maximum benefit rose to $1,657, up from $1,565.
In October 2022, the SSA also announced the maximum Social Security benefit for 2023, which rose by an even greater percentage to $1,827.
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How Social Security Credits Work
Qualifying for Social Security isn’t that difficult. Over the course of your working life, you need 40 credits to be eligible for benefits, which is equal to 10 years of full-time work. In 2023, you get one credit for every $1,640 of earnings, which is an increase from the 2022 figure of $1,510, up to a maximum of four credits per year.
Social Security calculates your benefit amount based on your earnings over the years, whether you were self-employed or worked for an employer. The more money you earned, the more you paid into Social Securityâand the higher your future benefitsâup to certain limits. The math is much more complicated than this sounds, but that’s basically how it works.
Social Security Wage Base Cola Set For 2023
Individual taxable earnings of up to $160,200 annually will be subject to Social Security tax in 2023, the Social Security Administration announced Thursday.
This amount, an increase from $147,000 in 2022, is the wage base limit that applies to earnings subject to the old age, survivors, and disability insurance tax. The employee and the employer each will pay $9,932 in tax at the OASDI tax rate of 6.2%.
The Medicare hospital insurance tax of 1.45% each for employees and employers has no wage limit it is unchanged for 2023.
Individuals with earned income of more than $200,000 pay an additional hospital insurance tax under Sec. 3103 of 0.9% of wages with respect to employment .
Self-employed individuals pay self-employment tax equal to the combined OASDI and Medicare taxes for both employees and employers, i.e., 12.4% of net self-employment income up to the OASDI wage base plus 2.9% in Medicare taxes on any amount of net self-employment income, with an offsetting above-the-line income tax deduction of half of the self-employment tax.
The SSA also announced on Thursday a cost-of-living adjustment of 8.7% for both Social Security and Supplemental Security Income benefits beginning in January 2023. The increase, based on the consumer price index, marks a trend of rising COLAs in recent years and compares with an increase of 5.9% in 2022 and 1.3% in 2021.
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Special Monthly Income Limit Rule For The First Year
Many people who retire mid-year have already earned more income than the limit allows. This is why there is a special rule where the earnings limit switches from an annual limit to a monthly limit.
This rule allows you to receive a check for any month you are considered retired by the SSA even if you have already exceeded the annual earnings limit.
That sounds straightforward enough but the interpretation of retired as defined by the SSA can cause some confusion. Heres what they mean by this term:
You are retired if your monthly earnings are 1/12 of the annual limit or less and you did not perform substantial services in self-employment.
Essentially, you are considered retired unless you make more than the income limit. The rule for the year you reach full retirement age also applies when working with the monthly limit. In this calendar year for 2023, the limit is $4,710 .
Its very important to remember that in the year following this first year, the monthly limit is no longer used and the earnings limit is based solely on your annual earnings limit.
Bonus: Some Medicare Premiums Will Be Lower
While Social Security and Medicare are different programs, most retirees participate in both, and this nationalized healthcare system made a particularly notable change for 2023.
Monthly Medicare Part B premiums will decrease from $170.10 in 2022 to $164.90 in 2023. As noted by the Centers for Medicare and Medicaid Services , the total Medicare enrollment was nearly 64 million in October 2021.
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Watch For These 5 Changes To Social Security In 2023
More than 70 million people depend on one of Social Securitys benefit programs, so annual changes to the program and its payouts are always highly anticipated. But substantially higher benefit checks have been a rarity in recent years. With inflation soaring in 2022, the extra money will help seniors and others make ends meet.
Increase In Earnings Limit
The so-called earnings limit also received a boost in 2022. The earnings limit is the amount that you can earn before the SSA temporarily reduces your benefit. Although you wont lose these benefits which will ultimately be paid back to you while youre working, your benefits are reduced by $1 for every $2 you earn above the limit. For the year you reach full retirement age only, your benefits are reduced by $1 for every $3 you earn above a separate limit. For 2022, those limits were increased to $19,560 and $51,960, respectively. For 2023, the limits will further jump to $21,240 and $56,520.
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What’s The Disability Earnings Limit For The Blind And Non
The SGA, or earnings per month, must fall beneath the allotted amount for the individual to receive full disability payments. The 2022 limit of $1,350 applies to disabled individuals who are sighted.
There’s a higher limit for blind individuals. They must stay below the monthly earning level of $2,260 .
What Happens If You Exceed The Annual Social Security Earnings Limit
Approximately 6 months after filing our joint tax return for 2018 which claimed earnings from Rebel Retirees part-time job, he received a letter from the Social Security Administration.
The letter explained that work and earnings caused a change in his benefit amount. It thoroughly explained the amount of overpayment. And it showed the amount that must be repaid to Social Security.
It stated that X amount of dollars from the September 2019 payment would be withheld in October to recover the overpayment.
As in all tax-related judgments, the letter informed Rebel Retiree of his right to appeal. It also stated his right to request a waiver if:
- The overpayment was not his fault in any way
- He could not meet living expenses if they recovered the overpayment
- If recovery would be unfair for some other reason
All of the figures were accurate and he had no reason to appeal.
We did not pay out of pocket in advance but simply waited for benefits to be withheld.
The overpayment in benefits was satisfied, and regular Social Security benefits returned the following month.
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What Is A Cost
In 1972, Congress added a provision to adjust SSI benefits to keep pace with the amount of money a person might need to maintain basic living expenses in the United States. To determine if there should be a cost-of-living adjustment, the Social Security Administration works with the Department of Labor to analyze the Consumer Price Index for Urban Wage Earners and Clerical Workers . The CPI-W determines how much, on average, employees across the nation pay per month for market expenses: groceries, transportation, clothing, etc.
According to the Social Security Administration, âThe purpose of the COLA is to ensure that the purchasing power of Social Security and Supplemental Security Income benefits is not eroded by inflation.â If inflation rises, a person might need more financial assistance to cover their basic costs of living like their groceries and their housing. Ideally, a COLA can help keep people afloat when the costs of living increase.
What Is Social Security Full Retirement Age
Full retirement age, or FRA, is the age when you are entitled to 100 percent of your Social Security benefits.
Depending on the year you were more, your Social Security full retirement age is between age 65 and 67.
Claiming Social Security benefits before your full retirement age will lower your monthly payments.
This includes Spousal Benefits.
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How Does Social Security Know
You might wonder how the Social Security Administration keeps track of your work and your earnings. The answer: It doesn’t. It’s your responsibility to report how much you’ve made.
“The biggest thing to remember if you are working is to notify the Social Security Administration if you’re going to earn wages in excess of the earnings threshold,” says Matt Ahrens, an associate financial advisor at Integrity Advisory Group.
Otherwise, he notes, “They will not be notified of your earnings until you file your taxes the following year. And if you were receiving excess benefits, you can be fined, forced to pay back the excess, or receive lower future benefits.”
A Rundown Of How Social Security Works
Let’s start by reviewing some basics about Social Security.
The Social Security administration uses a formula based on a worker’s income in their 35 highest earning years to calculate their benefits. Everyone is eligible to collect worker benefits starting at age 62, although full retirement age is between age 66 and 67, depending on when you were born. However, if you collect before FRA, your monthly benefit will be permanently reduced by a certain percentage for every month before FRA that you choose to collect.
Individuals who wait until age 70 to collect are able to earn an additional 8% in benefits for every year after the full retirement age. This means an individual with a full retirement age of 67 can earn 124% of their monthly benefit if they wait until age 70.
For example, if their monthly benefit was $3,000 at FRA but they waited until age 70 to collect, they would instead receive $3,720 per month.
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Earn At Least The Social Security Wage Base In Each Year
To truly maximize your Social Security benefit, you not only have to work at least 35 years, you have to earn a certain amount. The Social Security wage base is the amount of income from which Social Security taxes are withdrawn. Above that level, workers no longer pay Social Security taxes, so those earnings arent used in the calculation to determine benefits.
For 2023, the Social Security wage base is $160,200, and this amount is adjusted annually for inflation. To earn the maximum Social Security benefit, youll have to earn the amount of the Social Security wage base for each of your top 35 earning years, which can be tough to do.
In any given year, only about 6% of workers earn this amount but its necessary to garner the maximum Social Security benefit.