How SSA Determines Earnings Limits for Early Social Security Benefits

I have a client that is 62 and wants to draw benefits early and continue to work. When he is issued his W2, will SSA look at box 1 (wages, tips, other comp) for his earnings limit or box 3 (social security wages). I question this because if they are only looking at box 1, he wants to put enough money in his 401(k) to drop that box down below the earnings limit. Seems it would be box 3 but I cannot find anything definitive.

When a client decides to draw Social Security benefits early while continuing to work, it's essential to understand how the Social Security Administration (SSA) evaluates earnings to enforce the earnings limit. A common question arises: Does the SSA look at Box 1 (Wages, tips, other compensation) or Box 3 (Social Security wages) on the W-2 form to determine if a beneficiary exceeds the earnings limit?

Answer:

• Box 3 - Social Security Wages: The SSA uses the amount reported in Box 3 of the W-2 form, which reflects the wages subject to Social Security taxes. This figure is what the SSA considers when calculating whether an individual's earnings exceed the annual limit for those who take benefits before reaching full retirement age (FRA).

Implications for 401(k) Contributions:

• If your client is considering reducing their taxable income by contributing more to their 401(k), it's important to note that these contributions typically reduce the amount shown in Box 1, not Box 3. As a result, increasing 401(k) contributions will not affect the earnings reported to the SSA, as they use Box 3 (Social Security wages) to determine compliance with the earnings limit.

This clarification can help your client make informed decisions about their retirement income strategy, particularly if they plan to work while receiving early Social Security benefits.

The content on this blog is for informational purposes only and is not legal, financial, or professional advice. Social Security rules change periodically, so some information may become outdated. For the most accurate advice, consult a certified National Social Security Advisor (NSSA®). Social Security Professionals, LLC, and NSSA® are not responsible for any errors, omissions, or actions taken based on this blog's content. Use of this blog does not create a client relationship, and all information is provided "as is" without guarantees. By using this blog, you agree to hold Social Security Professionals, LLC, and NSSA® harmless from any claims or liabilities arising from its content. For personalized guidance, contact an NSSA® professional.