This Social Security Rule Hits Hardest If You’re Still Working

Many retirees keep working after they start Social Security, whether to cover rising costs or simply stay active. That income can help, but it also triggers a rule many people don't see coming.

Even if you're still paying Social Security taxes on your paycheck, your benefits can become taxable once your total income crosses certain thresholds. That shift can quietly reduce your take-home amount and lead to surprising retirement mistakes if you weren't planning for it.

Here's how the rule works and why it matters most if you're collecting benefits while still on the job.

How Social Security taxes work

Social Security can feel tax-free because you paid payroll taxes for decades. But once you start collecting, the IRS treats benefits like other income if your total earnings are high enough.

What matters is combined income, which adds together your adjusted gross income, any tax-exempt interest, and half of your Social Security benefits.

When your combined income exceeds fixed limits, a portion of your benefits becomes taxable. Here's how it breaks down:

• No tax: If combined income is below $25,000 for single filers or $32,000 for married couples filing jointly, benefits aren't taxed.
• Up to 50% taxed: Once income moves past those levels, up to half of benefits can be taxed.
• Up to 85% taxed: Above $34,000 for singles or $44,000 for couples, as much as 85% of benefits may be taxable.

Note that these thresholds are not adjusted for inflation. As wages and benefits rise, more working retirees get pulled into the taxable range without realizing it.

That's why continuing to earn income while collecting Social Security often leads to a higher tax bill than expected.

The difference between benefit taxes and benefit withholding

The tax-on-benefits rule is often confused with the retirement earnings test, but they work in very different ways. Both can reduce what you take home, yet they apply at different times and through different systems.

The earnings test only applies if you are under full retirement age (FRA) and still earning wages or self-employment income above an annual limit.

When that happens, Social Security temporarily withholds part of your benefit, usually $1 for every $2 earned over the limit, or $1 for every $3 in the year you reach full retirement age before your birthday month.

Those withheld amounts are not lost, though. Once you reach full retirement age, Social Security adjusts your benefit upward to account for the months when payments were reduced.

The distinction matters because both rules can apply at the same time. A working retiree under full retirement age could see benefits withheld due to earnings and still owe income tax on benefits because of other income, such as IRA withdrawals.

Why taxes on benefits often come as a surprise

Social Security feels earned and protected, so the idea that it can be taxed can come as a shock. The rule has been in place since the 1980s, but it rarely shows up until tax time.

The delay is part of the surprise. The checks usually arrive throughout the year, then the tax shows up later. By the time you calculate what you owe, the benefit already feels smaller.

One-time income can also tip the scale. A large IRA withdrawal, a bonus year of work, or selling an asset can push combined income over the threshold. The benefit didn't shrink, but taxes quietly took a bite.

Even routine increases can have the same effect. A modest cost-of-living adjustment (COLA) or a small raise can move income just far enough to trigger taxation. Inflation raises benefits, but the tax thresholds usually stay fixed, pulling more people into the taxable range over time.

When earnings, benefits, and other income overlap, the impact can add up quickly. That's why working retirees often underestimate how much taxes can cut into their Social Security.

Who is most likely to pay taxes on Social Security

Working retirees are often the first to feel the impact. People who claim at 62 or soon after usually receive smaller monthly benefits and may need to keep earning. That extra income can quickly push combined income into the taxable range.

Higher-income retirees face a different version of the same issue. Required minimum distributions (RMDs), large IRA withdrawals, or strong investment income can raise total income enough to trigger the 50% or 85% taxation levels. The benefit itself hasn't changed, but more of it becomes taxable.

Couples can reach the thresholds even faster. The joint limits, $32,000 and $44,000, apply to total household income, not each person separately.

When both spouses have income, or when one spouse has significant withdrawals or investment earnings, the combined amount can cross the line sooner than expected.

Bottom line

Working in retirement can bring in extra income, but it can also make more of your Social Security taxable. As total income rises, up to 85% of your benefits may be counted as taxable income, which can leave your take-home amount smaller than expected.

The key point is that the rules are fixed. Once you understand the thresholds, it becomes easier to see how work, withdrawals, and benefits fit together. Building this into your retirement plan can help you focus on the income you'll actually keep and reduce the chance of surprises at tax time.

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