If you claim Social Security benefits before reaching full retirement age (FRA) and continue to work, exceeding the earnings limit can result in a reduction of your benefits. Once you reach FRA, the earnings limit no longer applies, and you can work and earn any amount without penalty.
Here’s how the Social Security earnings limit works, along with tips to avoid unexpected surprises.
Meet Peggy: A Social Security Case Study
Peggy, born in 1961, who turns 64 in 2025. After decades in retail management, she’s considering cutting back her work hours and starting Social Security early—four years before her Full Retirement Age (FRA) of 67.
FRA is a government-set limit that varies based on your year, month, and day of birth. For those born on the second day of 1960 or later, it is 67. If you begin benefits before reaching FRA and continue working, then the Social Security earnings limit applies, and it will reduce your benefits if you earn too much.
In 2025, the Social Security earnings limit is $23,400 annually (or $1,950 monthly). If Peggy earns more than this, her benefits will be reduced. For every $2 she earns above $23,400, $1 will be withheld from her Social Security benefits.
How the Social Security Earnings Limit Works
If you start collecting Social Security before FRA and continue working:
- Under FRA: Your benefits are reduced by $1 for every $2 earned above $23,400 in 2025. This can be broken into a monthly test, applied $1,950 per month so if you retire mid-year you are not penalized for earnings prior to your retirement date.
- Year You Reach FRA: A higher earnings limit of $62,160 annually (or $5,180 monthly) applies in 2025. During this year, $1 is deducted for every $3 earned over the limit, but only earnings before your FRA month count. This can also be broken into a monthly test, applied $5,180 per month, so if you retire mid-year you are not penalized for earnings prior to your retirement date.
- After FRA: No earnings limit applies—you can earn as much as you want without affecting your benefits.
Thank goodness Peggy is savvy and exploring this now because if she doesn’t understand the rules, she could be in for a big, unpleasant surprise. Many folks begin Social Security benefits in their early 60s, thinking they can receive their full benefit amount while continuing to work and earn income. A year or so later, they get a notice that they must return some of their Social Security benefits. If they have already spent the money, this can be a big shock and result in financial hardship.
Example: Peggy’s 2025 Earnings and Benefit Reduction
Suppose Peggy earns $50,000 in 2025 while receiving $1,400 monthly ($16,800 annually) in Social Security benefits. Here’s how her benefits are affected:
- Peggy’s earnings exceed the $23,400 limit by $26,600 ($50,000 – $23,400).
- Social Security will withhold $1 for every $2 over the limit, reducing her benefits by $13,300 ($26,600 ÷ 2).
If Peggy had waited until FRA to claim benefits, she could have avoided this reduction. It could also have been avoided if all Peggy retired mid-year and thus all her earnings occurred before the month she began Social Security.
What Counts as Earnings?
The earnings limit only applies to wages or net self-employment income.
- Income from investments, pensions, IRA withdrawals, or unemployment benefits does not count.
For self-employed individuals, additional rules apply.
Avoiding the Earnings Limit: Peggy’s Options
For Peggy, the safest way to avoid the earnings limit is to wait until age 67 to begin Social Security. However, if she needs income sooner, she could:
- Work Part-Time: Earn below the $23,400 limit while supplementing with savings or retirement funds.
- Strategically Withdraw Social Security: If her situation changes, she can withdraw her Social Security application within 12 months and repay benefits received to reset her claim.
What Happens if Benefits Are Withheld?
If the Social Security earnings limit reduces your benefits, don’t worry—they aren’t lost forever. Once you reach FRA, your monthly benefit will be recalculated to account for the months when benefits were withheld. While this adjustment increases your monthly benefit, starting early still results in a lower lifetime benefit compared to waiting until FRA.
What If You Are Self-Employed?
The rules get more complicated if you are self-employed and plan to collect Social Security retirement benefits before your FRA. The Social Security website’s Special Earnings Limit Rule states that two tests must be met to be considered “retired” and not subject to the earnings limit.
- Your earnings cannot exceed the monthly amount of $1,950 if you are under FRA for the entire year, or $5,180 if it is the year you attain FRA, and,
- You must not have performed substantial services in self-employment, defined as devoting more than 45 hours a month to the business.
If you claim Social Security before FRA and have self-employment income, be prepared to verify hours worked in the business by month. If there were months where you did not perform substantial services for the business, no reduction in benefits would apply for those specific months.
When Does the Social Security Earnings Limit Change?
The earnings limit is adjusted each year depending on the formal measure of inflation based on the Consumer Price Index (CPI). In years where the earnings limit doesn’t change or only changes a little, that means the CPI recorded low or no inflation in the prior year.
Plan Ahead to Maximize Your Benefits
If you have a spouse or other family member who receives Social Security benefits based on your Social Security record and you go back to work and exceed the earnings limit, your dependents’ benefits may be reduced, too. This can apply when there are spousal benefits or benefits for dependents, such as minor children. See the Social Security publication How Work Affects Your Benefits for additional details.
Understanding the Social Security earnings limit is essential for making informed decisions about when to claim benefits. If you’re approaching retirement, consider your work plans, income needs, and overall financial strategy. For more guidance, check out the Social Security Administration’s Earnings Test Calculator or consult with a financial planner.
Learn More About Social Security
Claiming Social Security involves complex rules that vary based on your situation. To dive deeper, listen to Episode 3 of the Control Your Retirement Destiny podcast on either iTunes or Podbean, where we cover Social Security strategies in detail.
By planning carefully, you can balance work and retirement, ensuring your Social Security benefits support your goals without unnecessary surprises.
