Bonus Repayment Question - W2c / Claim of Right

[eled34]

Please note that I have a line-by-line statement from my employer detailing each overpaid amount for federal and state withholdings/deductions, insurance, 401(k), etcetera from the paycheck in which I received the overpayment. This should assist in calculating the exact amount I can reasonably expect back.

[Hal_Al]

The $16,000 was NOT the amount of income  tax you paid on the $40,000 bonus (and hence not the amount you will get back with the 2020 credit).  It was only the additional  withholding (FICA and estimated income tax) . 

If you have download  (not  online) 2019 Turbotax, you can use it to calculate your credit.  Simply reduce your income by $40K and compare the new refund (or balance due) amount to the old.   Or, you can use this tool:

https://turbotax.intuit.com/tax-tools/calculators/taxcaster/?s=1

to recalculate your 2019 tax  liability, without the $40K.

[Opus 17]

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@eled34 wrote:

Please note that I have a line-by-line statement from my employer detailing each overpaid amount for federal and state withholdings/deductions, insurance, 401(k), etcetera from the paycheck in which I received the overpayment. This should assist in calculating the exact amount I can reasonably expect back.

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No.  Withholding has almost nothing to do with the amount of tax you actually paid.

The only correct way to figure the credit is to re-calculate your 2019 tax return without the wages you repaid, and look at the difference in tax liability on form 1040, line 16.  If your bonus was $40,000 and you repaid the entire amount, reduce your wages by that same $40,000 and see what the difference is in line 16.  If you repaid less (for example, your employer adjusted for social security and medicare so you only repaid $36,940) then you base the credit calculation on the actual amount of cash out of pocket that you repaid, not the amount pre-adjustment.

You get your state taxes back by filing a claim of right claim on a state tax return, not the federal return.  You will have to research the procedure for your state, assuming they even have one.

You may be able to get your social security and medicare taxes by filing a separate form 843, it is not part of your federal tax return (form 1040) and would be filed separately.  You can actually file form 843 now, you don't have to wait for April 15 next year.  But, you will need a written statement from your employer confirming that the employer is NOT adjusting or refunding your social security and medicare taxes, and you will need to include a letter of explanation and additional documentation such as copies of your original and corrected W-2s. 

[AmeliesUncle]

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@eled34 wrote:

I was required to repay this bonus to my old employer at the pre-tax amount ($40,000) because I left within one year of receiving the bonus. I made this $40,000 repayment in January 2020 despite only receiving the net ~$24,000 in 2019.

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That was wrong.  You should NOT have repaid the Social Security and Medicare taxes.  Your employer owes you that back.

[Opus 17]

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@AmeliesUncle wrote:

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@eled34 wrote:

I was required to repay this bonus to my old employer at the pre-tax amount ($40,000) because I left within one year of receiving the bonus. I made this $40,000 repayment in January 2020 despite only receiving the net ~$24,000 in 2019.

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That was wrong.  You should NOT have repaid the Social Security and Medicare taxes.  Your employer owes you that back.

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I don't believe this is correct.  I have certainly seen enough cases over the past 10 years to know that the most common situation is where the employer doesn't adjust or rebate the social security and medicare taxes.  I don't think the situation would be as common if there was a regulation requiring the employer to make the repayment.  After all, the 2019 wages were correctly taxed as actually paid in 2019.

The social security and medicare taxes can be recovered by filing form 843.  The taxpayer will need a letter from the employer affirming that the employer will not be rebating the taxes themselves. 

[AmeliesUncle]

Publication 15 shows that an employer needs to amend the 941 for "Wage Repayments".  Although it refers to wages paid in "error", it also applies to this type of repayment.

When the employer amends the 941, the employer gets back BOTH halves of Social Security and Medicare taxes.  So the employer owes the employee those amounts.

Repayment of prior year wages.

If you receive repayments for wages paid during a prior year, report an adjustment on Form 941-X or Form 944-X to recover the social security and Medicare taxes. You can't make an adjustment for income tax withholding because the wages were income to the employee for the prior year. You can't make an adjustment for Additional Medicare Tax withholding because the employee determines liability for Additional Medicare Tax on the employee's income tax return for the prior year.

You must also file Forms W-2c and W-3c with the SSA to correct social security and Medicare wages and taxes. Don't correct wages (box 1) on Form W-2c for the amount paid in error. Give a copy of Form W-2c to the employee.

https://www.irs.gov/publications/p15#en_US_2020_publink[phone number removed]

[Chee_Am]

What if the repayment and the receipt of the bonus both happened in the same year 2023, but the employer still refuse to adjust the paystub and W2 to reflect the repayment, can I still use the same method to claim the deduction or credit on the tax return this year?

[Chee_Am]

Can you provide more details on how to claim the deduction or credit when the repayment happened in the same year, when the employer wouldn't make the adjustment? I paid back the signing bonus in April this year, which I received in February this year. The employer just kept refusing to adjust the paystub/the coming W2 to reflect the repayment.  

[AmeliesUncle]

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@Chee_Am wrote:

Can you provide more details on how to claim the deduction or credit when the repayment happened in the same year, when the employer wouldn't make the adjustment? I paid back the signing bonus in April this year, which I received in February this year. The employer just kept refusing to adjust the paystub/the coming W2 to reflect the repayment.  

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There is no requirement that the employer adjust a pay stub.  

You don't have the W-2 yet.  Most likely, it will be correct, so don't worry about it.

[Chee_Am]

Thank you for your reply. They clearly said in the email that they will not make the adjustment to reflect the repayment on the payroll side or the coming W2 and they kept saying that I can claim the duction or credit on my return. I probably just have wait until I receive W2 in January then go back to them and have them make correct it then.  

[Mike9241]

no. You can't use the tax recalculation method if repayment is in the same year as it was received. The IRS says first contact your employer and then if it won't issue a corrected w-2 contact them so they can contact the employer about the incorrect  w-2. If the correct w-2 is not furnished by filing time you can then use form 4852 to report the correct amounts. 

see this link

https://www.irs.gov/faqs/irs-procedures/w-2-additional-incorrect-lost-non-receipt-omitted/w-2-additi... 

note it's premature for the employer to issue a w-2 for 2023 so you need to wait until you get it or the end of February 2024 before you do anything. paystubs don't really matter. The actual w-2 does.