Short answer: Yes.
Here’s how it works.
Understanding Special Wage Payments
Certain types of compensation—such as severance pay, bonuses, deferred compensation, back pay, and payouts for unused vacation or sick leave—are classified as Special Wage Payments. These are payments made in a year after the work was performed.
Although these payments are still taxable, they are generally excluded from the Social Security earnings test.
Why This Matters
If you claim Social Security benefits before reaching Full Retirement Age (FRA), your benefits are typically reduced if your earned income exceeds annual limits. However, Special Wage Payments are not counted as “earned income” for this test when they are paid after you stop working.
That means a worker who has been laid off or retired can:
- Receive severance or similar payments
- File for Social Security benefits before FRA
- Avoid having those payments reduce their benefits under the earnings test
Earnings Test Limits (2026)
- Under Full Retirement Age: $24,480 annual earnings limit
- Year you reach FRA: $65,160 limit (applies only to earnings before the month you reach FRA)
Exceeding these limits with earned income can reduce your benefits. But again, Special Wage Payments paid after retirement do not count toward these limits, even if they appear on your W-2.
The Role of Form SSA-131
To ensure these payments are properly excluded, employers should complete Form SSA-131 (Employer Report of Special Wage Payments).
This form tells the Social Security Administration:
- The type of payment
- When it was earned
- When it was paid
What You Should Do
If you receive a significant one-time payment after leaving work:
- Ask your employer to complete Form SSA-131
- Confirm it is submitted to the Social Security Administration
- Keep a copy for your records
This step helps prevent unnecessary reductions in your Social Security benefits.
