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Bonus Payback

I left a job that provided a $10k bonus last year before my contracted time was up. I always knew that I was going to have to pay back the bonus and tried to contact them to no avail. Now the following year and three months later, I finally got the letter to start the process. Since this was given last year, I have already paid taxes on the money and filed the extra income with my taxes and submitted in April. They are requesting the entire amount. How can this happen if I have already taken the tax hit? I really do not want to file an amendment after the fact, as everything seems complicated a year later. What is my recourse and what is the best way to handle this?

Any help would be greatly appreciated.

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5 Replies

Bonus Payback

@whphillips - you would not complete an amendment.   The IRS has very specific rules on how to take a credit for this income.  TaxAct has a very good explanation and instructions on how to take a credit on your 2025 (yes 2025) tax return.  

 

https://www.taxact.com/support/14417/2024/repayment-of-income-general-irc-credit?hideLayout=False

 

Since most do not itemize, Method 2 would be the way to go in this case. Where it states "2024" replace that with "2025" 

 

 

Bonus Payback

You don't amend because you were paid what you were paid, in 2023, 2024 or whenever.

 

You report the repayment of wages in the year it happened (on your 2025 return).  Note there are actually 3 different things you need to do, and there is a rule not mentioned in the linked article.  There is a discussion here.

https://ttlc.intuit.com/community/taxes/discussion/sign-on-bonus-repayment-tax-adjustment-w2c-or-irc...

 

1. Federal taxes.  This is called an IRC1341 Claim of Right.  You can claim either a deduction or a credit for the repaid wages on your 2025 return.  The deduction is easy and can be done in any version of Turbotax, but to benefit, you must already used itemized deductions.  For the credit, you need to use the desktop version of Turbotax installed on your own Mac or PC from a download, because you need to enter the credit manually in Forms mode, not the Easyguide interview.  You must also calculate the amount of the credit yourself, by figuring what your taxes would have been in the year the bonus was paid if it was not paid, and the difference in tax is the amount of credit.

 

However, you can't use the credit method unless you had a reasonable belief at the time the bonus was repaid that you had an unrestricted right to the money.  If you knew at the time it was paid that you would be leaving and be required to pay it back, then you knew you did not have an unrestricted right, and you can only use the deduction method.  You don't need to send any proof to the IRS when you file your return, but keep proof of your situation for at least 3 years after you file in case of audit.  

 

2. State income tax.  If you pay state income tax, you should be able to make a similar claim of right on your state tax return.  We can't tell you how to do that, since there are so many different states.  Check your state tax web site, state tax instructions, see your own tax pro, or use one of the assisted versions of Turbotax next year.

 

3. Social Security and Medicare Tax.  You can claim a refund for social security and medicare tax that you originally paid on the bonus, if your employer does not refund it.  You do this by filing form 843 explaining the reason for the refund.  This form is not supported by Turbotax and is not part of your tax return, you file it separately by mail (no e-file) and you can file whenever you are ready.  But, you will need to include proof that you paid the taxes, and you will need a letter from your former employer in which they certify that they are not providing a refund of the social security and medicare taxes for you. 

Bonus Payback

Thank you! I appreciate your time and expertise-

So that I understand, if I received the bonus last year 2024 and repay it back in 2025, I claim the deduction (in 2026 actual year) for the 2025 tax year? I do itemize because I have rental properties. 

Bonus Payback


@whphillips wrote:

Thank you! I appreciate your time and expertise-

So that I understand, if I received the bonus last year 2024 and repay it back in 2025, I claim the deduction (in 2026 actual year) for the 2025 tax year? I do itemize because I have rental properties. 


Since the repayment is made in 2025, you claim the deduction or credit on your 2025 tax return, which you file in Spring 2026 (generally by April 15, 2026). 

 

Itemized deductions are not rental expenses.  Itemized deductions refer specifically to deductions on schedule A for medical expenses, state and local taxes, personal mortgage interest (not rental interest) and gifts to charity.  If your itemized deductions are less than the standard deduction, you would use the standard deduction instead on your tax return (check to see if you have a schedule A or not).  If you did not have a schedule A on your 2024 tax return and your finances are not expected to change in 2025, then you probably would not get the full benefit from the deduction method of claiming the repayment.

 

You are allowed to calculate the repayment both ways (deduction method and credit method) and use the one that is best for you (although as I said, there would be an audit risk if you use the credit method but you did not have a reasonable expectation at the time of the bonus that you had an unrestricted right to the bonus). 

Bonus Payback

To expand a bit on point #3 from Opus' first answer, I absolutely would NOT repay the full $10,000.  I would repay $10,000 minus Social Security and Medicare tax (in most cases, minus $765, for a total repayment of $9,235, but that could possibly vary if your wages were very high).

 

Your former employer will be amending their payroll forms to be refunded that Social Security and Medicare tax.  There is absolutely no reason why you should pay that to your employer AND that your employer be refunded that amount from the IRS.

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