Dear Rusty: I’m 63 and still working, and I receive Social Security benefits. Because of COVID-19 my employer has been giving us a $300 bonus, every 3 months. This will be $1,200 for the year and it will put me over the $18,240 earnings limit for this year. My question is, since these bonuses are COVID-19 related are they still considered earned income? My second question is, if I go over the limit does Social Security stop my check, even if it might be a portion of the check? Signed: Working During COVID-19
Dear Working: Whether your 2020 earnings (and those bonuses) put you over the annual earnings limit will depend upon how the bonuses are reported on your Federal income tax return (or your W-2 if you aren’t required to file). Your employer will send your W-2 earnings to the IRS which will, in turn, inform Social Security of your earnings. Social Security compares your 2020 W-2 earnings to the earnings limit to see if you exceeded the allowable limit. In other words, how your employer defines those COVID-19 bonuses and reports it to the IRS determines whether SS will count them toward the earnings limit. You should check with your employer’s Human Resources department to see if your COVID-19 bonuses will be considered as taxable earnings reportable on your W-2.
If you exceed the limit, and you don’t inform Social Security in advance that you did, they won’t know about it until they receive your W-2 information from the IRS (sometime next year, after you file your income taxes). They will then send you a notification that you exceeded the limit and tell you how much you owe them, and they will want to recover $1 for every $2 you are over the limit (half of what you exceed the limit by). They’ll give you the option to repay what they consider to be an overpayment in one lump sum, request a repayment plan or to have your SS benefits withheld for as many months as it takes for them to recover what you owe. Note they only withhold full months of benefits, not partial, so you could go several months without collecting any SS benefits until they recover what is owed.
The money they withhold because you exceeded the limit is not lost forever, because when you reach your full retirement age (66 ½ if you turned 63 in 2020) they will give you time credit for any months they withheld benefits. That means they will move your effective claim date forward by the number of months benefits were withheld, which will result in a small increase in your benefit amount. But you’ll get that higher benefit for the rest of your life, enabling you to eventually recover the money they withheld because you exceeded the limit. And for information, during the year you reach your full retirement age (FRA) the limit goes up and the penalty is less, and once you reach your FRA there is no longer a limit to how much you can earn while collecting benefits.
Russell Gloor is an Association of Mature American Citizens certified social security advisor. To submit a question, visit amacfoundation.org/programs/social-security-advisory or email ssadvisor@amacfoundation.org.
