How Working in Retirement May Affect Your Social Security and Medicare

Not all people who retire do so completely. While estimates vary, the data suggests that about one in five retirees continues to work in some way, per T. Rowe Price’s 2022 Retirement Saving & Spending Study.

Staying employed in retirement, even if only part-time, allows seniors to retain structure and purpose in their everyday lives. For about half of the retirees surveyed by T. Rowe Price, the income from continuing work also provides a welcome financial boost.

These “extra innings” of work often coincide with receiving retiree benefits, including Social Security and Medicare. That combination of earnings from work and federal payments can have financial implications.

You probably expect to pay income tax on your earnings, but you might not know that your work income in retirement can also determine how much of your Social Security benefits are taxed, and what you pay in Medicare premiums. While this doesn’t affect many working retirees — for reasons we explain below — it’s important to include these topics in the list of factors if you're considering working in retirement.

Here’s a guide to how working in retirement might affect your federal benefits and your taxes.

Medicare coverage

When most people retire, they leave behind the health insurance coverage they may have received through their employer. If you’re at least 65 and no longer covered by a group insurance plan based on current employment, you can enroll in Medicare — either when you turn 65 or in a special enrollment period after you quit working and lose your employer coverage.

The program has several parts, each with differing implications if you intend to work in retirement:

Part A. This part of the program covers hospital stays. Working retirees, regardless of their income, generally pay nothing in premiums for this Medicare coverage. To qualify, you or a spouse need only to have worked and paid Medicare deductions — which employers generally withhold from your pay automatically — for about a decade (40 quarter-years, to be precise).

Parts B and D. These parts of the program cover doctor visits and prescription drugs, respectively. Most recipients, regardless of their retirement income, pay a monthly premium for Part B and (if enrolled) Part D.

Higher-income beneficiaries pay more for this coverage. The premium calculation is based on your tax return from two years prior. That is, your 2023 income would determine your 2025 premiums. This means that if you’re newly retired, the government will use your pre-retirement work income to calculate your premiums.

If your modified adjusted gross income (MAGI) exceeded $106,000 (for single filers) or $212,000 (for married couples filing jointly) on that “lookback” tax return, you would pay higher Part B and Part D premiums.

How much more might you pay? As an example, a couple filing jointly with a MAGI of between $266,000 and $334,000 in 2023 would pay surcharges — known as IRMAAs, for Income-Related Monthly Adjustment Amounts — totalling about $220 a month, on top of the standard premium of $185. All in, each spouse would pay a total of about $400 a month in premiums.

For most people, income drops in retirement, even if they keep doing work. Unfortunately, the government doesn’t automatically recalculate your Medicare premiums if and when you make less. When that happens, you need to file with the Social Security Administration (through an SSA-44 form) to have your surcharges recalculated based on your new, lower retirement income.

What effect might retirement earnings have on your new, recalculated Medicare premium? Little to none, most likely. The exception might be if your earnings from work, plus your other retirement income, push you over those six-figure thresholds at which the surcharges kick in.

Social Security benefits

More than half of families — 57%, according to Social Security Administration estimates — who receive Social Security benefits pay federal income tax on some portion of them.

Tax on Social Security benefits is less straightforward than that on ordinary income. The proportion of Social Security payments that are taxable varies by your total combined income. Sometimes referred to as provisional income, this is a figure the I.R.S. calculates by adding your adjusted gross income (AGI) — for most taxpayers, that’s money you earn from a job or investments — plus interest from municipal (or other tax-exempt) bonds, plus half of your Social Security benefits.

That provisional income, in turn, counts towards the income thresholds that are used to calculate your tax obligations. Here are the income thresholds and the proportion of benefits that are taxable at each of them:

• Single: If your combined income is less than $25,000, no benefits are taxable. If it’s between $25,000 and $34,000, up to 50% of benefits are taxable. Above $34,000, 85% of benefits are taxable.
• Married filing jointly: For a couple with a combined income of less than $32,000, no benefits are taxable. If it’s between $32,000 and $44,000, up to 50% of benefits are taxable. Above $44,000, 85% of benefits are taxable.

What implications does tax on your Social Security have on how earned income is taxed in retirement? For many middle- and higher-income retirees, some portion of Social Security will be taxable under the long-standing thresholds. Wages from post-retirement work contribute to those limits, and could, at least in theory, make more of your benefits taxable.

In reality, though, your income from sources other than work would have to be very low for work earnings to edge you over a tax threshold for Social Security, and so increase how much of your benefits are taxed. For most retirees, then, working a little in retirement should not change how much of their Social Security benefits are taxable.

Other factors affecting tax on your retirement income

Three other factors may affect the taxation of your retirement income.

One immediate factor affecting Social Security taxes depends on where you live. Nine states collect their own tax at least some Social Security benefits: Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont and West Virginia. If you live in those places, you could also face state tax on a part of your Social Security income. Many of these jurisdictions, though, offer deductions or phase-outs that limit who actually pays. Check your state’s rules.

Another development has the potential to entirely eliminate federal tax on Social Security benefits. Legislation introduced this year by Democrats in both the House and Senate proposes just that. Whether the bills pass is an open question.

President Donald Trump did repeatedly vow on the 2024 campaign trail to end the taxation of Social Security benefits. Trump has yet to implement such a ban. But the Republicans’ “big, beautiful bill” that became law this year includes a new deduction for seniors that aims to help defray the effects of federal taxes on Social Security benefits.

Adults 65 and older will be able to claim an additional deduction of up to $6,000. The full amount will be available to individual taxpayers with up to $75,000 in modified adjusted gross income or to married couples with up to $150,000. The deduction will gradually phase out for taxpayers with incomes above those thresholds.

The temporary deduction — currently in effect for tax years 2025 through 2028 — will be available to eligible taxpayers regardless of whether they take the standard deduction or itemize their taxes.

The bottom line

For many workers, employment income in retirement may not change the net federal benefits you receive. But because work earnings will increase your combined income, your tax burden could potentially increase.

As before retirement, consider the best financial strategies to minimize what you pay in taxes. Keep an eye on total income from wages, retirement account withdrawals and investments. Consider planning moves that might reduce your taxes, including examining the new senior deduction you may be able to claim beginning with your 2025 tax return.

Finally, consider getting professional help to assist you in handling work income in retirement, especially if you’re a high earner. The implications of these earnings can be complex. A professional such as a financial planner can help answer those questions and assist with managing your retirement portfolio, if you wish.