Turning on Social Security Early? Keep Your Final Paystub to Avoid Penalties
If you are planning to retire prior to your social security full retirement age, and you are also planning on turning on your social security benefits as soon as you retire, you have to be aware of a flaw in the social security system that may automatically prompt social security to attempt to assess an earned income penalty error against your social security benefit in the year that you retire.
Social Security Earned Income Penalty
If you elect to begin receiving Social Security benefits prior to your full retirement age, Social Security assesses a penalty against the Social Security benefits that you receive if your earned income exceeds a specific threshold. That limit in 2025 is $23,400. If you have earned income over $23,400, and you file for social security benefits prior to your FRA, social security will assess a penalty equal to $1 for every $2 over the $23,400 threshold.
For example, Scott retires at age 63; his full retirement age for Social Security is 67, but he elects to file for Social Security benefits as soon as he retires. Scott continues to work part-time and makes $35,000. Since Scott’s income is $11,600 over the $23,400 threshold, social security will assess a $5,800 penalty against Scott’s social security benefit in the following year.
Social security does not assess the penalty by requesting a check from Scott, instead, if Scott was receiving $2,000 per month in Social Security, then the following year they would withhold 3 months of social security payments from Scott, totaling $6,000 to cover the penalty, and then Scott’s monthly benefit would resume after the penalty months have been assessed.
Note: Social security does not withhold partial months for the penalty; if $100 is still owed in the penalty and the monthly SS benefit is $2,400, social security will withhold the full $2,400 monthly benefit to assess the final $100 penalty amount owed.
Flaw In Assessment of Social Security Income Penalty
There is a common flaw in the assessment of the Social Security earned income penalty in the year that an individual retires because it’s a common occurrence that prior to an individual actually retiring, they may have already earned more than the $23,400 income threshold with their employer prior to turning on their social security benefits. Will they be doomed and have to pay the SS penalty, or is there a way to appeal the earned income penalty in these cases?
Thankfully, it’s the latter of the two. In the year that you retire, if you stop working and then turn on your social security benefits AFTER you have stopped working, the income earned prior to the month that you turned on your social security benefits is ignored for purposes of the social security earned income penalty.
For example, Jen, age 64, works for ABC Company from January – May, and then fully retires May 30, 2025. Between January – May, Jen had a W-2 income of $40,000, well above the $23,400 SS earned income threshold. However, since Jen did not turn on her social security benefits until June, after she had received her final paycheck from ABC Company, the $40,000 in W-2 that she earned prior to turning on her SS does not count toward the $23,400 income penalty threshold.
However, here is the flaw. Social Security has no idea when Jen stopped working during the year. All social security knows is that Jen turned on her social security prior to her full retirement age, and according to her tax return filed in that year, her earned income was over the $23,400 threshold. Due to this flaw, we coach clients by saying, “expect social security to attempt to assess the earned income penalty, but keep your final pay stub which shows the date of your final payroll and the total W-2 amount, which should be the amount of earned income that was reported on your tax return”. It may also be helpful to obtain a letter from your employer verifying your final date of employment and the total W-2 income earned at the time of separation from service.
Individuals Who Retire but Then Work Part-time
There are situations where individuals retire from their primary career, turn on Social Security after receiving their final paycheck, but then later in that calendar year they work part-time or start a business that produces income. There is a special assessment of the Social Security earned income penalty for these individuals. The income earned prior to turning on their social security benefit is still ignored, but assuming that their income exceeds the $23,400 threshold before they retire, social security allows these individuals to continue to collect their social security benefit without penalty as long as:
Their monthly income received does not exceed $1,950 ($23,400 divided by 12 months) …..AND
The individual did not perform substantial services in self-employment. The definition of substantial services means devoting more than 45 hours a MONTH to the business or between 15 – 45 hours to a business in a highly skilled occupation.
Exceeding either of the thresholds listed above will trigger the penalty.
Full Retirement Age – No Income Limits
Once you have reached FRA (full retirement age) for Social Security, the earned income penalty no longer applies. You can then earn as much as you want in earned income, and the Social Security earned income penalty will not apply.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Frequently Asked Questions (FAQs):
What is the Social Security earned income penalty?
If you begin receiving Social Security benefits before reaching your full retirement age (FRA) and continue to earn income from work, the Social Security Administration may reduce your benefit. In 2025, the income limit is $23,400. For every $2 you earn above that amount, $1 of your Social Security benefits is withheld.
How does Social Security apply the penalty?
Social Security doesn’t send you a bill. Instead, it withholds full months of future benefit payments until the penalty amount is repaid. For example, if your penalty is $5,800 and your monthly benefit is $2,000, Social Security would withhold three full months of benefits ($6,000 total).
What happens if I retire mid-year and already earned more than the limit?
If you stop working and turn on your Social Security benefits after retirement, your earnings from earlier in the same year do not count toward the $23,400 limit. However, because Social Security’s system doesn’t automatically know when you stopped working, it may incorrectly assess a penalty.
How can I appeal an incorrect earned income penalty?
Keep your final pay stub showing your last paycheck date and total W-2 income, and ask your former employer for a letter verifying your final date of employment. You can use these documents to appeal the penalty and demonstrate that your income occurred before you began receiving benefits.
Can I work part-time after turning on Social Security before full retirement age?
Yes, but limits still apply. As long as you earn less than $1,950 per month (the monthly equivalent of $23,400 per year) and do not perform “substantial services” in self-employment (more than 45 hours per month, or 15–45 hours in a highly skilled field), your benefits will not be reduced.
What happens once I reach full retirement age (FRA)?
Once you reach FRA, the earned income penalty no longer applies. You can earn as much income as you want without any reduction in your Social Security benefits.
Why is the earned income penalty considered a flaw?
The flaw arises because Social Security’s system uses annual income data from tax filings without knowing when during the year the income was earned. This often causes the system to mistakenly flag retirees who stopped working mid-year as exceeding the income limit, even when they are not subject to the penalty.
