Part-Time Work in Retirement: The Good, the Bad, and the Tax Implications

The Real After-Tax Value of Part-Time Income

Suppose you retire at 64, collect Social Security, and pick up a part-time job earning $25,000 per year in consulting income. You might assume you are $25,000 better off. The tax reality is different. First, the consulting income is self-employment income, which carries a 15.3% self-employment tax on the first $184,500 of net earnings in 2026. On $25,000 of net consulting income, that is $3,825 in self-employment tax. You can deduct half of it from gross income, which softens the blow slightly, but the out-of-pocket cost is real. Second, the $25,000 of additional income increases your adjusted gross income. If you were already collecting $30,000 per year in Social Security and had $20,000 in IRA distributions, your combined income calculation for Social Security taxation purposes rises significantly. In the 85% taxation zone - which applies once combined income exceeds $34,000 for singles or $44,000 for married couples - each additional dollar of earned income can cause 85 cents of Social Security to become taxable. For a married couple with $40,000 in Social Security and $20,000 in IRA distributions, adding $25,000 in part-time income pushes combined income from approximately $60,000 to $85,000 - well above all Social Security taxation thresholds. The full 85% of Social Security is taxable, adding roughly $21,000 more in taxable income than before the part-time work began. Third, the higher total income may trigger IRMAA surcharges on Medicare if it pushes 2024 MAGI above $109,000 for a single filer. Even a small amount of income above a threshold adds $81.20 per month per person to Medicare Part B premiums alone. On a $25,000 part-time income, suddenly paying $1,946 more per year in Medicare premiums changes the effective return on that work substantially.

The Social Security Earnings Test Before Full Retirement Age

For retirees who claim Social Security before their Full Retirement Age of 67 - which applies to those born in 1960 or later - part-time work creates an additional complication: the Social Security earnings test. In 2026, if you are collecting Social Security benefits before FRA and your earned income exceeds approximately $22,320 (the annual exempt amount for those below FRA), Social Security reduces your benefit by $1 for every $2 of earned income above that threshold. This is not a permanent reduction - the withheld amounts are credited back to you when you reach FRA through a recalculation of your monthly benefit. But in the meantime, you receive smaller checks. For someone earning $35,000 in part-time income while collecting Social Security at age 63, the excess over $22,320 is $12,680. The benefit reduction is $6,340 per year - real money withheld from the current benefit check. The fact that it is technically recredited at FRA is cold comfort when the immediate cash flow drops. Once you reach FRA, the earnings test disappears entirely. You can earn any amount without affecting your Social Security benefit. This makes the question of when to claim Social Security and whether to work part-time intertwined - timing both decisions together produces better outcomes than optimizing each one independently.

Self-Employment Retirement Contributions Offset the Tax Impact

The silver lining for retirees with self-employment income is that earned income opens the door to retirement plan contributions - even in retirement. Contributing to a Solo 401(k) or SEP-IRA based on consulting income can offset a significant portion of the additional tax burden. For self-employed consulting income of $25,000 net, a SEP-IRA allows a contribution of up to 25% of net self-employment income - approximately $4,700 in this scenario. That contribution is deductible, reducing AGI and pulling income back below Social Security taxation thresholds or IRMAA limits. For higher earners doing more substantial part-time work - say, $80,000 in self-employment income - a Solo 401(k) becomes more powerful. You can make employee deferrals of up to $24,500 (or $35,750 if ages 60-63 with the enhanced SECURE 2.0 catch-up) plus a profit-sharing contribution of up to 25% of net self-employment income. The total contribution could exceed $40,000, meaningfully reducing the taxable income from part-time work. This strategy requires planning in advance. The Solo 401(k) must be established before the end of the year in which contributions are first made. A retiree who starts consulting in January and waits until December to think about tax planning may find the plan establishment deadline has passed.

The Non-Financial Case for Part-Time Work

Despite the tax complexity, part-time work in retirement is often worth it - and not just financially. Research on retirement and longevity consistently finds that people who remain engaged in purposeful activity live longer and report higher life satisfaction than those who move directly to full leisure. The psychological transition from work to retirement is real and underestimated. The loss of professional identity, daily structure, intellectual stimulation, and social connection happens all at once on the day of retirement. Part-time work - even at a fraction of prior income - maintains those connections and provides the structure that makes leisure genuinely enjoyable rather than aimless. From a financial perspective, even a modest part-time income delays drawing down savings. An extra $15,000 per year (after taxes) that replaces a portion of portfolio withdrawals is equivalent to having an additional $375,000 in savings at a 4% withdrawal rate. It also gives Social Security benefits more time to grow if claiming has been deferred. The key is going in with realistic expectations about the after-tax take. Model your income carefully before accepting a part-time role - account for self-employment tax, the Social Security taxation interaction, and potential IRMAA exposure. Use the retirement tax calculator to see what your actual take-home will be. Then make the decision about whether the work is worth it on both the financial and personal terms together.