Payback employer tax issues
Sign Up

Why sign in to the Community?

  • Submit a question
  • Check your notifications
or and start working on your taxes
Announcements
TurboTax has you covered during Covid. Get the latest second stimulus info here.
cancel
Showing results for 
Search instead for 
Did you mean: 
New Member

Payback employer tax issues

Hello, I am planning to leave my employer (issues not related to financials, but scope of work, how I feel I am treated at work, long term career progress etc.) 

When I joined I took a sign on cash bonus of, say $100

If I leave I have to payback the amount as per employment contract.

I obviously got only about say $60 of that $100 (california tax and federal tax = $40)

 

If I come up with the cash (can be through another sign on bonus from next employer), I will pay my current employer $100

How can I claim the $40 that I paid in tax ?

What is the process ? Is it considered a loss ? or something else ?

Are there any limits ?

 

Thanks

 

 

6 Replies
Level 15

Payback employer tax issues

If the bonus and the repayment occur in the same year, the employer must adjust your W-2, there is no remedy on your tax return.

 

If the bonus was paid in a previous year and you already paid tax on it, but the repayment is less than $3000,  there are no tax remedies on your tax return.  You would have to see if your employer would deduct it from your current pay and adjust your W-2 accordingly.  

 

If the repayment was more than $3000, then the following happens:

 

1. On your federal return, you can take a special itemized deduction or take a Claim of Right credit.  

 

The itemized deduction is not subject to any limitations, but you must already itemize your other deductions (state and local taxes, mortgage interest and so on) for this deduction to get you full benefit.

 

The claim of right tax credit is a special tax credit in the amount of excess taxes from the prior year.  You have to figure out on your own what your taxes would have been in the year the bonus was paid without the bonus, and the difference is the amount of the credit.  You enter the credit manually on your tax return for the year you made the payment, you need Turbotax installed on your own computer to do this, you can't do it online.  We can tell you where to enter this when the time comes.

 

2. For your state tax return, you will have to investigate on your own what their rules are, there is probably a claim of right credit or a deduction.

 

3. For your social security and medicare taxes, the employer could refund those to you and give you a corrected W-2 for the year you paid the bonus.  If the employer will not refund the social security and medicare taxes, you will need to file form 843.  This is a separate form, not part of your income tax return and not supported by Turbotax.  You will need proof of the wage repayment, and you will need a letter from the employer stating they will not be refunding the now-excess social security and medicare taxes. 

 

Note that for the claim of right credit, you must have had a reasonable belief at the time the bonus was paid, that you had an unrestricted right to the money.  I have seen it argued that if this bonus was contingent on you working a certain number of years, then you knew you did not have an unrestricted right to the money.  I can't judge the validity of the argument, and the only tax court cases I could find on the claim of right involved large corporations.  If you don't use the claim of right, you can still use the special itemized deduction instead.    Whichever you choose, be sure to keep your records for 6 years after filing your tax return. 

 

From your example of $40 tax on $100 bonus, $7.50 is social security and medicare tax which you get back with form 843, $22 is federal income tax which you would take as a claim of right tax credit, and $10 or so would be state income tax which you can probably get back, although I don't know the rules for the different states. 

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
New Member

Payback employer tax issues

Opus 17, Thank you so much for your response.

Yes, the bonus was based on my staying at my employer for 2 years. But I plan to leave 6-8 months earlier for reasons mentioned below.

So I am guessing I did not have unrestricted right to the money

New Member

Payback employer tax issues

And the payment was done in 2019. 

The repayment will most likely happen in early 2021 (or late 2020).. in any case the bonus payment received and the payback will be different years

 

thanks

 

Level 15

Payback employer tax issues

In theory, you should only pay back 92.35% of the bonus. This is because, your employer can get the 7.65% withheld for FICA (social security and Medicare tax) back from the Social Security Agency.  But, in practice employers usually ask for the full amount back, either because they're not aware or don't want to do the paper work, including written consent from you. 

 

Actually, they can get back 15.3%; the 7.65% you paid and the 7.65% they paid.

Level 15

Payback employer tax issues


@taxhelp37 wrote:

Opus 17, Thank you so much for your response.

Yes, the bonus was based on my staying at my employer for 2 years. But I plan to leave 6-8 months earlier for reasons mentioned below.

So I am guessing I did not have unrestricted right to the money


I would not disagree that you should use the itemized deduction and not the claim of right, but I am not a lawyer.  If the itemized deduction leaves you significantly short compared to the claim of right method, you might consult a tax professional for an opinion.  (For some people, the two methods will be identical, but the credit method will give a better recovery for some taxpayers.)  Try it both ways before you decide what to do. 

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
Level 15

Payback employer tax issues


@Hal_Al wrote:

In theory, you should only pay back 92.35% of the bonus. This is because, your employer can get the 7.65% withheld for FICA (social security and Medicare tax) back from the Social Security Agency.  But, in practice employers usually ask for the full amount back, either because they're not aware or don't want to do the paper work, including written consent from you. 

 

Actually, they can get back 15.3%; the 7.65% you paid and the 7.65% they paid.


This is step 3 above.  The employer could require a lower repayment (the same net effect as refunding the tax) but many don't, in which event the taxpayer files an 843 instead. 

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
Dynamic Ads
v
Privacy Settings