How Are Social Security Benefits Affected by Your Income?

Social Security benefits may be affected by a variety of factors, but your earned income is one of the most important. Your benefits in retirement are largely dependent on the wages you received while working since the Social Security taxes taken out of your paycheck are based on that amount. If you are still working and at retirement age, you can receive benefits while earning other income; depending on your age, you can also reduce and delay your Social Security payouts. Other important factors for determining Social Security benefits include inflation and the formula used by the Social Security Administration in its calculations.

Simply put, the more you earned while working, the higher the income benefit you receive from Social Security. The government keeps a record of your income from year to year, and the portion of your earned income that is subject to FICA taxes is used to determine your benefits in retirement.

If you paid into the system for more than 35 years, the Social Security Administration only uses the 35 highest earning years and does not include any others in its formula. If you did not pay into the system for at least 35 years, a value of $0.00 is substituted for all missing years. After you apply for benefits, these earnings are indexed and used to calculate a "primary insurance amount" that reflects the maximum sum you are eligible to receive after reaching full retirement age.

The age at which you start receiving benefits is also important. As of 2018, the youngest age to receive benefits is 62, but your benefits are reduced if you select to receive them that early. This is to compensate for the additional years of Social Security income paid out to you. However, if you take benefits before reaching full retirement age and continue to work, it is possible to withhold some benefits to get higher payouts in the future.

It is not uncommon to work into or beyond retirement age. If you are earning an income while receiving Social Security benefits, you may have some benefits withheld if you make enough money. Until you reach full retirement age, earning more than the Internal Revenue Service income threshold reduces your benefits by $1 for every $2 earned in excess of the minimum. These dollars are not lost forever; rather, your Social Security income is increased once you reach full retirement age.

Under normal circumstances, your Social Security benefits are not taxable. If, however, your income while taking benefits is higher than the maximum limits established by the IRS, your benefits become partially taxable. Nobody pays income taxes on more than 85% of benefits, however.