What Counts as Wages for the Social Security Earnings Test?

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What Counts as Wages for the Social Security Earnings Test?

The Social Security program was intended to help those who are not working or cannot work support themselves. Unfortunately, this philosophy does not help those who continue to work while collecting Social Security benefits. If you are under what the Social Security Administration calls “Normal Retirement Age” and make over a certain amount of money, your monthly benefits can be reduced. Worse, while we may be familiar with what makes up our yearly income due to filing taxes for the IRS, the Social Security Administration has different definitions for terms as seemingly simple as “wages.”

The Social Security Administration is clear that “all pay for work” counts as income for the earnings test that determines if your monthly benefits would be reduced. This includes net earnings from self-employment, cash tips so long as you get more than $20 in tips per month, and wages. Capital gains, interest, dividends, and most other types of income for which “work” was not done (in the eyes of the Social Security Administration), do not count as income for the earnings test .

“Wages” leads to a problem. For the IRS, some things can reduce your taxable wages. The most common is funding a 401(k). This income is excluded from tax, which means that it is not even entered on to your tax return. Effectively, your wages are lowered. But does funding your 401(k) reduce your wages for the Social Security earnings test too?

Frustrating as it is, the answer appears to be no. The list of things that count as income for the earnings test makes no mention of an exception for wages diverted to a 401(k). Neither does the list of things that do not count as income for the earnings test. The page entitled “Wages for Social Security Purposes ” also does not mention it. As a result, it seems like the Social Security Administration does not recognize the IRS’ beneficial treatment of 401(k) contributions as valid for its own purposes.

Practically, this means that you should not reduce your wages by the amount you contributed to your 401(k) before you match your income to the earnings test table to see if your benefits will be reduced.

Linguistically, this means that “wages” has two separate, conflicting definitions for the two agencies that have the most sway over Americans’ money: the IRS and the Social Security Administration. These two agencies should not be allowed to mean different things by the same technical term when those agencies themselves work for the same organization.

To read more about the Social Security Earnings Penalty and who it affects, I recommend Matthew Illian’s post here: “Social Security Earnings Penalty?

Contrary to the normal way of things, this time what Uncle Sam gives with the IRS, he takes away with the SSA.

Photo used here under Flickr Creative Commons.


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Financial Analyst

Matheson Russell is the Financial Analyst for Marotta Wealth Management. He specializes in tax laws, forms, policy, and planning. He loves complex rules systems, animals, and Koine Greek. His favorite stories are The Jungle Books.