Social Security & You: The Social Security earnings penalty for self-employed people | Business News


“Well, Tom, you see, I’m a farmer. I got about 100 acres of beans and I really only work two months a year. I plant those beans in April and harvest them in October. The rest of the time I’m almost on my ass. Oh, I’ll fix some fences and work on my equipment. But that doesn’t take 45 hours, so I want my Social Security check for the other 10 months of the year.”

What’s that about? I’ll get back to the bean farmer in a minute. But first, I need to tell you all about the Social Security “pension test” and how it applies to the self-employed.

I despise this part of the Social Security Act. It causes headaches for Social Security Administration employees and heartache and overpayments for Social Security recipients. It is a terrible law and should be abolished. But it’s been a law for almost as long as Social Security, so about 80 years now. And it probably won’t go away anytime soon, so we’re stuck with it. And I have to explain it to you.

People also read…

Once you reach your full retirement age, these outdated rules will disappear. But if you’re under full retirement age and you’re still working, the Retirement Testing Act says this: “For every $2 you earn over an annual limit (which is currently $19,560 per year), $1 must be withheld from any Social Security benefits you owe.” The law is called a pension test because it is intended to ‘test’ whether you are retired and therefore whether you are eligible for a pension benefit.

Going back to the very beginnings of Social Security, the law always said you had to be “retired” to receive “retirement” benefits. And those rules used to apply to everyone. But over the years, Congress gradually diminished the effect of this onerous law. Initially, they said the pension test would not apply to people over the age of 72. Then they lowered that to 70. And then they finally lowered that to full retirement age. In other words, if you’ve reached your full retirement age, you can make $1 million a year and still get your Social Security checks.

But Congress never changed the law for people under full retirement age, so they’re stuck with the “retirement test,” which I better call the “income penalty” because if you’re under full retirement age and you’re enjoying Social Security , will be penalized if you start earning more than $19,560 per year.

Now, on the surface, the law seems pretty cut and dried. So you might be wondering, “What’s the problem? Why is this law such a problem?”

As with so many things, the devil is in the details. For example, let’s say you’re 63 years old and on Social Security, and you take a part-time job that’s going to pay you $25,000 a year. So you report that to the Social Security Administration and they withhold $2,720 on your next few Social Security checks. (That’s half of what you plan on making over $19,560.) But then you’re fired after making only $20,000, so now the SSA owes you some money back. But a few months later you find another job and now the SSA has to withhold part of your benefits again. And then later in the year you get a big bonus and the SSA has to withhold even more. But the next year you quit that job and now the SSA owes you money. It just becomes a vicious cycle of being paid too much and too little. Like I said, it’s an administrative nightmare for the SSA and a major hassle for the Social Security beneficiary.

And I haven’t even mentioned the special rules that apply in the first year you receive benefits and in the year you reach full retirement age. And for the purposes of this column, I will only explain the former.

In the first year you start signing Social Security checks, a special monthly income test may apply. That test says that even if your annual earnings exceed the annual income limit, you must pay a Social Security check for every month you earn less than a monthly limit — which is always one-twelfth of the annual amount.

A quick example will clarify this. Let’s say Bob turns 63 in September 2022 and he wants his benefits to begin. But he will work until the end of August and will earn $80,000 from January through August. That’s well above the annual income threshold of $19,560, so you might think Bob won’t be able to get benefits in 2022. But because it’s his first year receiving benefits, a special monthly rule comes into effect. And that rule says that although Bob if he earns much more than $19,560 in 2022, he can get a Social Security check for every month he earns less than $1,630 (or one-twelfth of $19,560). Because he won’t be working from September to December (in other words, he’ll make less than $1,630 during those months), he’ll have to take a Social Security check from September to December.

What a mess. And this mess gets even bigger when you’re self-employed. An additional provision will be added for these people. It says that in addition to keeping your income below the annual or monthly limit, you are also not allowed to perform any substantial services in the business. And the rules say that if you work 45 hours or more in a month, you’re doing substantial shifts in the business.

As an example, let’s go back to Bob who wants his Social Security to start in September 2022, when he turns 63. But let’s say that instead of working for pay, Bob owns a little mom-and-pop motel.

And he says that when he turns 63, he’s going to hand the business over to his wife. But then he says that from September he will continue to work “a few hours a day to help my wife.” Well, that works out to 60 hours a month – and that’s over the 45-hour limit, meaning Bob will still technically be providing substantial services in his business. And according to this stupid wage penalty law, that means Bob won’t get Social Security benefits.

And that brings me back to the farmer I mentioned at the beginning of this column. When I first started working for the SSA in 1973 in a small farming community in central Illinois, these guys figured out how to get around this stupid law (which had slightly different rules at the time). They told me that in April (when they sow crops) and October (when they harvest) they only worked more than 45 hours a month on the farm, meaning they did not provide substantial farm services for the other 10 months of the year. . And that meant they could get Social Security checks every year for those months.

I knew they were lying. They knew they were lying. But because we clearly didn’t have the staff to spend time researching all the farmers in the two provinces we served, I really couldn’t help it. I can’t say it often enough: it’s a stupid law and a mess to enforce.

If you have a Social Security question, Tom Margenau has a book with all the answers. It’s called ‘Social Security: Simple and Smart’. You can find the book at Or search for it on Amazon or other bookstores. Visit to learn more about him, read past columns and see features from other Creators Syndicate writers and cartoonists.

The Valley Voice
The Valley Voice
Christopher Brito is a social media producer and trending writer for The Valley Voice, with a focus on sports and stories related to race and culture.


Please enter your comment!
Please enter your name here

Share post:


More like this