If you continue to work after you begin collecting Social Security benefits, it could cause your benefits to be reduced or become subject to income tax. How much you stand to lose depends on your age and paycheck.
What Income Counts
Social Security's definition of "earnings" includes your net profit if you're self-employed and/or wages from a job. Bonuses, commissions, vacation pay -- anything that would be included on a W-2 -- get added, plus tips or other compensation not reported to your employer.
Early Social Security
If you start collecting Social Security before your full retirement date – age 66 for people born between 1943 and 1954 – your benefits will be lowered if your earnings exceed $14,160 in 2011. For every $2 you are paid above $14,160, you will lose $1 in Social Security benefits.
The Last Year
In the year you reach full retirement age – 2011 if you were born in 1945 – the annual limit increases to $37,680, and it takes $3 in extra earnings before you lose $1 in benefits. Only the earnings you receive before the month in which you reach full retirement age are counted. For example, if you turn 66 in February, you could collect a $7,000 paycheck and a $30,000 bonus in January without affecting your Social Security benefits.
How It Works
Social Security asks you for an earnings estimate each year -- specifically if you expect to be paid more than $1,180 in any month or $14,160 for the year. Let's assume you started receiving benefits early, $1,200 a month. If your earnings projection is that you will be paid $6,000 more than the earnings limit, your benefits will be cut $3,000. Social Security will withhold all your benefits for the first two months of the year, and you will receive $600, half of your benefits, in March. You will start getting your full benefit in April.
No Honor System
Your earnings estimate isn't the final word. When you file your tax return, the IRS gives Social Security a report. If your earnings estimate was too high, the government will pay you the lost benefits. But if you underestimated your paycheck -- or failed to notify Social Security that you would be over the earnings limit -- you'll be notified that you must send in a lump sum repayment or future benefits will be withheld until the overpayment is reconciled.
Getting Back Reduced Benefits
When you reach full retirement age, Social Security will credit you for the months in which you did not receive a full benefit. Assume you lost a total of 12 months of benefits during years you were over the earnings limit and you started receiving benefits at age 62. At your full retirement age, Social Security would increase your monthly benefit permanently to what you would have received had you begun benefits at age 63.
Too much income -- earnings or otherwise -- at any age can cause your Social Security benefits to be taxed. A quick way to find out: Add your adjusted gross income, your nontaxable interest and dividends and half your Social Security benefits. If you're filing as an individual and your total is $25,000 to $34,000, as much as 50 percent of your benefits may be taxable. If the result tops $34,000, up to 85 percent of your benefits may be taxable. For a joint return, the threshold numbers are $32,000 and $44,000.