Ok, let's go back to the beginning because this discussion is now 5+ pages and there are several people's problems mixed in. Your original post was:
Hi @Opus 17 ,
I've a similar question but slightly different.
I received $15k signing bonus in 2019, and quit my job in 2020. I have to now repay 50% of it minus Social Security/Medicare which is approximately ~$7k.
And your question today is,
@agrawal_aashish wrote:
Hi @Opus 17
They're taking it out of my annual bonus check after tax.
(A) So my basic understanding is that the $7k I owe them in sign-on bonus re-payment will be adjusted against my annual bonus amount after tax. So if my gross bonus amount is ~$10k, and the after tax amount is ~$7.5k, I'll gain $500.
(B) My initial feeling was that the $7k sign on bonus will be adjusted against my pre-tax gross bonus amount $10k, and that I'd then gain $3k (and that the $3k will be taxed).
Now knowing how they're doing it, wanted to understand if adjusting repayment against after-tax annual bonus amount as laid out in (A) would result in me losing money vs. (B) and if I should push back and advocate for (B).
Thanks!
In your situation, A and B are basically the same, because the repayment is already adjusted for social security.
When you were originally paid the bonus, this $7,500 (gross) that you need to pay back was subject to -- let's estimate -- 24% federal tax of $1800, 7.65% SS/Medicare of $573, and state tax of let's say 6% = $450.
If the employer is letting you repay $7000 after-tax (or $6927), then you are already made whole on SS/Medicare, and if you file a claim of right with the IRS and your state income tax, you will be repaid the $1800 and $450. It doesn't matter if they pay your full bonus check and you write a separate check for the $7000, or if they take it as an after-tax deduction. You pay full tax on this year's bonus, which means you don't net a bonus in your take home pay after the $7000 after-tax deduction, but you get the $1800 and $420 state and federal claim of right tax credits on your 2020 tax returns.
If instead, the employer reduced your bonus by $7500 pre-tax, you would see something in your bonus check now, but you could not take the claim of right credits on your tax returns since you repaid the 2019 bonus with pre-tax instead of after-tax dollars. It's a wash.
It's less paperwork for you if they pre-taxed your repayment, and it changes when you see the money, but the net cost/benefit to you is the same.
