For American retirees, Social Security is the most important social program. About 65 million people receive a payout from this program monthly. A large number of people collecting these benefits are retired workers. According to the Center on Budget and Policy Priorities analysis, about 40% of seniors will face poverty if there are no guaranteed monthly benefits. With Social Security, the poverty rate is less than 10%.
You will be amazed to know that not all employees receiving the benefits are retirees. Some workers decide to work, either full-time or part-time, while collecting their retiree benefits from the Social Security program. Suppose you are among these people, or you claim your benefits while you are employed. In that case, you must note that some changes are inevitable in 2021.
Change in retirement earnings test exemption limit.
The change in retirement earnings test is perhaps the most significant change to Social Security benefits in 2021. With the retirement earnings test, the Social Security Administration (SSA) can withhold early retirees’ benefits if they earn above a specified income limit. Early retirees are retired workers (according to the SSA) receiving a monthly payout before they reach the federal retirement age (FRA).
The predetermined earnings threshold for retired workers receiving the benefits who won’t reach 67 in 2020 is $18,420 per year or $1,520 per month. Suppose you are in this category, and your income doesn’t pass this limit. In that case, the benefits administration will not withhold your benefit. Once you exceed this limit, $1 will be withheld from your benefits for every additional $2 you earn. Early retirees who will reach the federal retirement age in 2021 and even those that will not reach it also have an income threshold. You should know that once you reach the full retirement age, the retirement earnings test doesn’t apply to you, irrespective of when you start claiming your benefits. Besides, you don’t lose the withheld benefits forever; rather, you will later receive them as higher monthly benefits when you reach the federal retirement age.
Tax deferrals on Social Security will become due in 2021.
If you are taking your benefits now, you might witness a surge in payroll taxation next year. You may know that taxes on earned income are the primary revenue source for Social Security. The payroll tax generates more than 80% of the benefits revenue in 2019. In August, the executive order signed by President Trump was done to increase employee take-home pay temporarily while they pass through the COVID-19 pandemic.
Although not everyone opted for the payroll tax deferral, 2021 will surprise many Americans who have spent their extra income since September. President Trump’s executive order is not a payroll tax break. You will repay those deferred taxes into the program in 2021. This means that employees who defer their payroll taxes will repay it next year, and this can affect senior workers who rely on their benefits and salary to make ends meet.
High-earning workers may owe more payroll taxes.
Suppose you are a high earner receiving the benefits; you may pay more taxes next year. In 2020, you will pay the payroll tax if you are earning between $0.01 and $137,000. Since many employees’ yearly income will be below $137,000 this year, they will pay payroll taxes on every dollar they earn. If your yearly earnings exceed $137,700, you will not pay the payroll tax. Therefore, the payroll tax earnings cap will increase to $142,000 in 2021. This may not affect most Americans since they may not reach this cap, but it will affect high earners who are also self-employed since they will be paying an extra $632.40 as tax next year.