Social Security Income Penalties Are Refunded To You When You Reach Fully Retirement Age

If you decide to turn on your Social Security payments before your full retirement age, the IRS has something called the Social Security Earnings Test where they assess a penalty if you make over a specified amount during that tax year. For 2025, that amount is $23,400 and the penalty is $1 for every $2 you earn over that threshold, but not many taxpayers realize that Social Security actually refunds you the penalty amounts once you reach full retirement age. In this article, I will walk you through:

• Social Security Full Retirement Age Based on Date of Birth
• Social Security Earnings Test
• How they assess the Social Security earnings penalty
• How does Social Security refund you the penalties paid when you reach full retirement age
• Other social security filing considerations

Social Security Full Retirement Age

As I mentioned in the intro, if you turn on Social Security PRIOR to your Full Retirement Age (“FRA”) and you continue to work, you are subject to the SS earnings test and possible penalties. Your SS full retirement age varies based on your date of birth:

The final column in the chart above shows the permanent reduction in your social security benefit if you turn on your SS benefit at age 62. If you plan to turn on your social security prior to your full retirement age and you plan to continue to work, you have to be careful with this decision. Not only are you permanently reducing your SS benefit, but you are also subject to the Social Security earnings test.

Once you reach Full Retirement Age, the SS earnings test goes away, you can make as much money as you want, and social security does not assess a penalty.

Social Security Earnings Test

Here’s how the social security earnings test works. If you turn on your SS benefit prior to full retirement age and you make more than $23,400 in 2025, SS will assess a penalty of $1 for every $2 you earn over that limit (50% penalty). The IRS increases the income threshold a little each year. Let’s look at the example below:

• You are age 63
• Your monthly social security benefit is $1,000 ($12,000 annually)
• You made $26,320 in earned income in 2025

In the example above, you earned $4,000 in income above the limit ($26,320 - $23,400 = $2,920). Social Security will assess a penalty of $1,460 ($2,920 × 50%).

How Do You Pay The Social Security Earned Income Penalty?

Let’s keep building on the previous example, you failed the earnings test, and you owe the $1,460 penalty, how do you pay it? The good news is you don’t have to write a check for it; instead, social security will withhold your social security payments the following year until you have satisfied the penalty. In the example above, your monthly SS benefit was $1,000 and you had a $1,460 penalty. Social security will withhold two of your monthly SS payments the following year and then your monthly social security payment will resume as normal.

Note: Social security does not withhold partial months, only full months to assess the penalty which means they may technically assess a larger penalty than what is actual due based on the 50% over the limit calculation.

The math for this example came out easy, 2 months exactly, but what if your monthly benefit is $1,000 and the penalty is $2,400, which would be 2.4 months of benefit payments? Social security rounds UP all fractional months, so they would withhold 3 full months of your social security payments even though that means they are withholding $3,000 to pay back a $2,400 penalty. The additional $600 that they withheld will be refunded back to you when they process the refund of the earned income penalty at your full retirement age. *reword to match example? (YES DELETE THIS SECTION)

Social Security Does Refund You The Penalties At Full Retirement Age

If social security withheld some of your monthly payments due to a failed earnings test prior to reaching your FRA, the good news is, once you reach full retirement age, social security refunds those penalties back to you. Unfortunately, they do not just send you a check for the dollar amount of all of those missed payments. Instead, upon reaching full retirement age, they recalculate your monthly social security payment taking into account those missed payments.

The easiest way to explain the refund calculation is via an example:

• Your SS full retirement age is 67
• You turned on your SS payment at age 62
• Your monthly SS benefit payments are $2,000
• Every year you made $8,000 over the SS earnings test limit
• This resulted in a $4,000 earned income penalty each year
• SS withheld 2 months of your benefit payments each year to assess the penalty
• 2 months × 5 years of SS payments = 10 months of missed payments

Between age 62 and reaching age 67, social security withheld a total of 10 months of your social security payments. Upon reaching FRA 67, instead of continuing your monthly benefit at $2,000, they credit you back those 10 months of payments, by recalculating your social security benefit assuming you originally turned on your SS benefit at age 62 & 10 months instead of age 62 & 0 months. This reduces the amount of the permanent penalty that you incurred for turning on your social security benefit prior to full retirement age, and you will receive a slightly higher social security benefit for the rest of your life to repay you for those earned income penalties that were assessed prior to full retirement age. It may take you a number of years to recoup those penalty payments, but how long you live will ultimately determine whether this refund calculation benefits you or the social security system.

Other Considerations Before Turning on Your SS Benefit Early

After reading this article, it may seem like a no-brainer to turn on your SS benefit early: if you earn too much in a given year and get assessed a penalty, so what — you just get the money back later. But it’s important to understand that there are other factors that you need to take into consideration before turning on your social security benefits early which include:

• The impact on the survivor benefits for your spouse
• The breakeven age of turning on the benefits early versus waiting
• How social security benefits are taxed
• Taking advantage of the automatic increase in the amount of the benefit each year
• The 50% spousal benefit
• Your life expectancy

Here is our article on Social Security Filing Strategies covering these other considerations.

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 Earnings Test?
The Social Security Earnings Test applies if you claim benefits before your full retirement age and continue to work. In 2025, you can earn up to $23,400 without penalty; beyond that, Social Security withholds $1 in benefits for every $2 you earn over the limit.

Does the earnings test apply after reaching full retirement age?
No. Once you reach your full retirement age (FRA), the earnings test no longer applies. You can earn an unlimited amount without any reduction in your Social Security benefits.

How is the Social Security earnings penalty paid?
You don’t pay the penalty out of pocket. Instead, Social Security withholds full monthly benefit payments until the total amount of the penalty is recovered. Because the program only withholds full months, it may temporarily take more than the exact penalty amount.

Does Social Security refund withheld benefits at full retirement age?
Yes. Once you reach your FRA, Social Security recalculates your benefit to credit back the months that were withheld due to the earnings test. Rather than sending a lump-sum refund, your monthly benefit is permanently increased to reflect those previously lost months.

How does the refund adjustment work?
When you reach full retirement age, Social Security recalculates your benefit as if you had started payments later—reducing the early-claiming penalty. For example, if you began benefits at age 62 and had ten months of payments withheld, your benefits would be adjusted as though you started at age 62 and 10 months, increasing your future monthly payments.

What factors should you consider before claiming Social Security early?
Before turning on benefits early, consider the long-term impact on survivor benefits, the break-even age compared to waiting, potential taxation of your benefits, annual cost-of-living adjustments, spousal benefit eligibility, and your life expectancy.