Accounting & Tax News

:: Ray Floch, CPA, Partner
631.425.1800 ext. 312
G.R. Reid Associates, LLP

Consider Carefully If You Should Work After “Retirement.”

Since an individual's excess earnings may affect his own benefits as well as those that are payable to his dependents, while the earnings of a dependent or survivor reduce only the social security check of that dependent or survivor, before considering any type of work, an individual should determine the expenses of working. The individual would have to pay social security or self-employment taxes on those earnings—even though he is receiving social security benefits. He also may be required to pay federal income taxes on that income, depending on his total income. An individual should remember that, above a certain level of income, a portion of any social security benefits is taxed. Also important are direct expenses, such as the cost of transportation, meals, clothing, etc.

An individual also should remember that if he earns more than $14,160 in 2011 (unchanged from 2010) and is between age 62 and full social security retirement age (subject to the special rule for individuals reaching full social security retirement age in 2010), he must forfeit $1 in benefits for each $2 of excess earnings—a 50 percent reduction in earnings over $14,160 (or $1,180 per month). Individuals who reach full social security retirement age in 2011 forfeit $1 in benefits for each $3 in excess benefits for each month before reaching full social security retirement age; the income level for these individuals is $37,680 or $3,140 per month (both unchanged from 2010).

Individuals need to face these facts head-on; however, the offset of earnings against early retirement benefits is merely a factor to consider in determining whether to continue to do least some paid work after electing to receive early retirement benefits. The offset should not prevent an individual from working who needs or chooses to do so. If an individual is collecting benefits and knows that his earnings will exceed the annual limit, he should notify his local Social Security Administration (SSA) office. By doing so, benefits can be withheld currently instead of the individual having to repay them later. As soon as his earnings drop, the benefit payments can start in full again. He must file a report of his calendar year earnings by April 15 of the following year. The report form is available at any SSA office and is filed with SSA, not IRS.

An additional point to remember about continuing to work: More earnings may help raise an individual's social security retirement benefit. If an individual has worked all of his life in social-security covered employment, higher current earnings may substitute for earlier lower earnings years. If close to the minimum years of coverage, additional years of work raise the amount of benefits payable even more directly. SSA runs an automatic process to check if the latest year of earnings turns out to be one of the highest 35 years and will refigure the benefit and pay any increase due. This process usually completed by October of the following year. For example, by October 2011, a beneficiary would get an increase for 2010 earnings if those earnings raised the benefit due; the increase would be retroactive to January 2011.