Paying back sign-on bonus (but already taxed)

[sphereck]

(I'm in NY.)

Hi,

I have a pretty similar problem as some here: I'm leaving my company early and therefore have to pay back the sign-on bonus.

The problem now is, that it was already taxed in 2009 and I also got the tax reimbursements for last year as well.

To make it more clear here an example:

Pretax Bonus = 3000
Post-tax Bonus = 2000
Got back some of the 1000 through the tax reimbursement, but given that I also had other income it is kind of hard to distinguish between which part of the tax reimbursement was for which part of the income.

Anybody any ideas what the rules are in this case? Is it still possible to deduct something from the W-2, given that it was already taxed last year?

Please let me know.

d.

 

[pattytx]

To clarify, the bonus was paid in 2009 and you repaid it in 2010?

 

[sphereck]

Yes exactly.

(I haven't repaid it yet, but will be required to.)

 

[swalsh411]

Proper or not, it's really up to your payroll department on how they want to handle it. Are they taking it out of your wages or are you writing a check? For repayment of wages from a prior year you should be paying back the gross. (I know that doesn't really make sense and I didn't believe it at first either but that is how it's supposed to happen)

 

[pattytx]

From the American Payroll Association.

Federal Income Tax-

If the employee repays the advance or overpayment in a later year, the amount of the repayment cannot be excluded from the employee’s income for that year or any year. The employee may be able to take a deduction from income or a tax credit on his or her personal tax return for the repayment, subject to certain restrictions. While the employee’s Form W-2 for the year of the repayment would be unaffected by the repayment, the employer should give the employee a separate receipt showing the repayment.

Social Security and Medicare Taxes-

If the employee repays the advance or overpayment after the
employer has filed its Form 941 for the quarter during which the overpayment was made (whether during the same or a later year), the employer must refund any overwithheld social security and Medicare taxes to the employee. The employer must keep a receipt noting the date and amount of the employee’s repayment, as well as written evidence of the refund paid to the employee. A written statement should also be obtained from the employee to the effect that the employee will not seek a refund of the social security and Medicare taxes directly from the IRS. This must be obtained before the employer can claim a credit or refund of the employee’s and employer’s shares of overpaid social security and Medicare taxes (see Section 8.6 for details on how this is accomplished). If the repayment is made in a year after the advance or overpayment was made, the repayment will not reduce the employee’s social security or Medicare wages for the year of repayment. If the repayment results in an overpayment of social security or Medicare taxes for the earlier year (i.e., the employee’s wages for the earlier year did not reach the social security wage base even after considering the repayment), the employee must be issued a Form W-2c, Corrected Wage and Tax Statement, for that year.

 

[sphereck]

I'm not sure yet as to whether I have to write a check, or whether they take it out from my account. I had Direct Deposit until now - does that make a difference?

@pattytx:

1. Can you send me the link to the original document, especially the document which contains the first quote?

2. So is the following correct? I can't show the payback on my W-2 for 2010, but I can request a receipt. With that receipt I might be able to get some tax credits. These are pretty bad conditions .

 

[pattytx]

1. Sorry, no. This is a proprietary reference source published by the Association.

2. That is correct.

 

[sphereck]

@pattytx:

I read some stuff in publication 525 and this drew my attention (page 36):

"If you had to repay an amount that you included in your income in an earlier year, you may be able to deduct the amount repaid from your income for the year in which you repaid it. Or, if the amount you repaid is more than $3,000, you may be able to take a credit against your tax for the year in which you repaid it."

Does this mean I would have to do something with respect to my 2010 taxes or 2009?

 

[pattytx]

The year in which you repaid it--2010. A good tax preparer should be familiar with what you need to do. Honestly, even with more than 30 years experience in payroll, if I had this situation, I would get that advice as well.

 

[sphereck]

@pattytx:

Okay thanks!

Three more points if it's okay:

1.

I read this in P525:

"Repayment over $3,000. If the amount you repaid was more than $3,000, you can deduct the repayment (as explained earlier under Type of deduction). However, you can choose instead to take a tax credit for the year of repayment if you included the income under a claim of right. This means that at the time you included the income, it appeared that you had an unrestricted right to it."

I'm looking at the last sentence. Does a bonus which you have to pay back if leaving early qualify as "unrestricted right"?

2.

What has to be included in the receipt? Is it better if my employer writes me a letter that I repaid the amount? What would have the letter to include so that the risk of denial by IRS is as minimal as possible?

3.

I'm still not sure whether I get the overall plan:

1. I got $4000 (pretax) as sign-on bonus in 2009.
2. I received $3200 after taxes.
3. I got a refund for 2009, which also included other income. From the $800 I paid for taxes I got back around $500 (I don't think I can put a specific number on this, since other income affected the whole return as well).
4. I will pay back the $4000 and get a receipt.
5. In the 2010 taxes I will use these $4000 as a deduction.

Now my problem is point 3 and point 5. I got back $500, but still can deduct the whole $4000? How does that work?



Thanks so much for your help!

 

[swalsh411]

You're confusing your tax refund (which is an overpayment of your withholding vs. your total liability for the year) and a tax deduction (which is a reduction in taxable income). Totally different things. No offense intended but if you are confused on that fairly simple concept then you need the help of a tax professional. (there is no shame in getting help to do your taxes!).

I wouldn't worry too much about what you get in terms of a receipt. if you have the pay stub from your bonus and the canceled check from the repayment (or pay stubs if they took it out of your wages) that should be sufficient.

 

[sphereck]

@swalsh411: No offense taken .

However I know the difference between refund and deduction. But that difference doesn't really help me with my questions.

1. I'm still not sure whether I have to go with the deduction, or whether a tax credit is possible too.

3. It still isn't clear whether I deduct the whole bonus and how it plays together with the refund (from 2009!) I already got.

Any ideas?

 

[pattytx]

My expertise is in the payroll end, not the individual income tax end. See an experienced tax preparer.

Regarding the receipt "Bob paid back XX net for sign-on bonus paid in 2009 per our agreement. This amount is inclusive of all taxes withheld from the original payment ."

 

[sphereck]

@pattytx: And you are sure that I'm not allowed to ask my employer to subtract the bonus (received and taxed in 2009) from my W-2 for 2010?

Thank you so much for your help!

 

[pattytx]

@pattytx: And you are sure that I'm not allowed to ask my employer to subtract the bonus (received and taxed in 2009) from my W-2 for 2010?

Thank you so much for your help!

I am positive. At the time your W-2 was issued, it was a valid and includible payment.