Retirement Side Hustles and Social Security: The Rule That Changes Everything
Taking a side gig after retirement can be a great way to supplement Social Security and make your savings last longer. But if you retire before age 67, a rule called the Social Security earnings test affects how much you can earn before your side income starts to affect your benefits.
“The earnings test is not a tax or a penalty even though it feels like one,” according to Achim von Bodman, CFP® and senior tax manager at Watter CPA.
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MoneyLion digs into how this Social Security rule figures into your retirement income, and what you can do to avoid any snafus during your golden years.
The Social Security Earnings Test Explained
Here’s how it works: Say you retire in 2026 at age 62, the earliest age you can collect Social Security. You can earn up to $24,480 with your side gig with no impact on Social Security. But for every $2 you earn above that amount, Social Security withholds $1 of your benefits.
The limit increases to $65,160 the year you turn 67, and your benefit is reduced by $1 for every $3 you earn above that amount, up until the month before you reach full retirement age.
The rule doesn’t apply to income you earn once you turn 67, so you can earn as much as you want after that with no reduction in benefits. Until then, you might have to rethink what “retirement” means to you.
“Retiring and claiming [Social Security] are two choices, and people often mix them up,” von Bodman explained. “You can stop working without applying, keep working without applying or apply while you are still working.”
The costly choice is applying for Social Security early while still working because that permanently reduces your benefit, plus you give some back (temporarily) because of the earnings test.
However, those withheld months are not gone for good, von Bodman said. “At retirement age, which is 67 for anyone born in 1960 or later, they recalculate your benefit and add those months back, increasing your monthly check for life,” which amounts to forced delayed claiming. “The catch is you only come out ahead if you live enough to make up for it,” von Bodman added.
Are Side Gigs Worth It Given the Rule?
So, is the gig work worth it? Most of the time, yes, especially for people whose gig work replaces low- and no-earning years in their Social Security benefit calculations, which include your 35 highest-earning years. Even aside from that, von Bodman said the temporary benefit reduction alone doesn't negate the side gig’s value because the money isn't actually lost.
The real question, then, isn’t whether or not to work a side gig — it’s whether you should limit your earnings or delay Social Security until you stop working.
“Stay under $24,480, or better yet, wait to apply and let the benefit grow by 8% each year and the earnings test never affects you,” von Bodman advised.
You’re Not Out of the Woods at Full Retirement Age
The earning limit isn’t the only rule that can have ripple effects on your Social Security benefits. Tax rules can hit you with a double-whammy.
“Gig income is self-employment income, so it comes with the 15.3% self-employment tax on top of income tax,” von Bodman explained. It also leads to what he calls the “tax torpedo” — tax the IRS imposes on Social Security benefits once retirees’ earnings reach certain thresholds.
“Half of your Social Security benefit counts toward the income that decides how much of your benefit is taxable,” von Bodman said.
The IRS taxes 50% of your Social Security if your income (including half of your benefit) is $25,000 to $34,000, and it taxes 85% of your benefit if your income exceeds $34,000 — thresholds von Bodman said haven’t changed for decades and are not adjusted for inflation.
Look Before You Leap Into a Side Gig
Von Bodman said the time to weigh the effects of a side hustle on Social Security is before you take the work, not after. That way, you can explore all your options to find the most beneficial strategy.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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