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repayment of Sign on bonus

In 2020, I had to repay $20k of sign on bonus to my former employer and my wages were only around $10000 in 2020 with that employer. So, I'm wondering if the W2 can show a negative number on it and if Turbotax will allow me to enter a negative wage number.

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repayment of Sign on bonus

No.  You will need to claim the repayment in a different way.

 

It is possible for the employer to reduce your reported wages, but they don't have to do it that way.  For example, if you earned $10,000 and repaid $20,000, they could issue a W-2 with $1 of wages, but that would leave you with a $10,000 repayment to deal with.  Or, they could issue a W-2 for the full amount of your wages ($10,000) and then you have to deal with a $20,000 repayment.

 

There are 3 parts to getting your taxes back on the repayment.  

 

#1. Federal tax return.  You can deal with this in one of two ways, either as a special itemized deduction, or a special IRC 1341 claim of right credit.  If you already itemize your deductions, and your income is about the same in both years, then both methods will give about the same result.  Also, you can only use the claim of right credit if you had a reasonable belief at the time the bonus was paid that you had an unrestricted right to the money.  If audited, this could be tricky, since you probably signed a contract that said that you would repay the money if you failed to meet certain conditions.  That could be viewed as not having a reasonable belief that you had an unrestricted right to the money, especially if you knew when you accepted the bonus that you might not meet the conditions.  This is a legal issue I can't advise on, you might want to seek professional help.  You can always use the special itemized deduction for the repayment, no matter what the reason for your departure was. 

 

If you think you are entitled to use the claim of right credit, then you can decide to use either the deduction or credit, whichever saves you the most tax.  To use the special deduction, enter it under "less common deductions" at the bottom of the deductions and credits page.  Click through the options that don't apply to you and eventually you will see "repayment of wages from a prior year."

 

To use the credit, you must figure out on your own, how much less your taxes would have been in 2019 (or whatever year the bonus was paid) if you had not received the bonus.  That is the amount of your credit.  to enter the credit, you must use Turbotax installed on your own computer from a CD or download; switch to "Forms" mode, go to Schedule 3, and manually enter the amount on line 12d, and write "IRC 1341" on the space next to the amount.  If you use Turbotax Online, you can't make manual adjustments; however, if you use Turbotax Live (the most expensive version) your Live CPA assistant might be able to make the entry for you.

 

#2 State income tax.  You will need to research your state taxes to see how to enter a repayment of wages or claim of right credit.  As there are more than 40 states with income tax, I'm not an expert on how to enter the state tax adjustment but there probably is one.

 

#3. Social security and medicare tax.  To get a refund of the social security and medicare tax that was withheld on the bonus, you will need to file form 843.  This is separate from your tax return and not supported by Turbotax.  You will need to submit copies of paperwork related to the bonus and repayment (contract, demand letter, etc.) and you will need a letter from the employer stating that they will not be adjusting or repaying your social security and medicare tax.  (Of course, if your wages with the employer were more than the social security wage base -- $137,700 -- for the year you received the bonus, then reducing your wages by the amount of the bonus might not have reduced the social security tax you would have paid, so you would only be entitled to a refund of the medicare tax.)

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8 Replies

repayment of Sign on bonus

No.  You will need to claim the repayment in a different way.

 

It is possible for the employer to reduce your reported wages, but they don't have to do it that way.  For example, if you earned $10,000 and repaid $20,000, they could issue a W-2 with $1 of wages, but that would leave you with a $10,000 repayment to deal with.  Or, they could issue a W-2 for the full amount of your wages ($10,000) and then you have to deal with a $20,000 repayment.

 

There are 3 parts to getting your taxes back on the repayment.  

 

#1. Federal tax return.  You can deal with this in one of two ways, either as a special itemized deduction, or a special IRC 1341 claim of right credit.  If you already itemize your deductions, and your income is about the same in both years, then both methods will give about the same result.  Also, you can only use the claim of right credit if you had a reasonable belief at the time the bonus was paid that you had an unrestricted right to the money.  If audited, this could be tricky, since you probably signed a contract that said that you would repay the money if you failed to meet certain conditions.  That could be viewed as not having a reasonable belief that you had an unrestricted right to the money, especially if you knew when you accepted the bonus that you might not meet the conditions.  This is a legal issue I can't advise on, you might want to seek professional help.  You can always use the special itemized deduction for the repayment, no matter what the reason for your departure was. 

 

If you think you are entitled to use the claim of right credit, then you can decide to use either the deduction or credit, whichever saves you the most tax.  To use the special deduction, enter it under "less common deductions" at the bottom of the deductions and credits page.  Click through the options that don't apply to you and eventually you will see "repayment of wages from a prior year."

 

To use the credit, you must figure out on your own, how much less your taxes would have been in 2019 (or whatever year the bonus was paid) if you had not received the bonus.  That is the amount of your credit.  to enter the credit, you must use Turbotax installed on your own computer from a CD or download; switch to "Forms" mode, go to Schedule 3, and manually enter the amount on line 12d, and write "IRC 1341" on the space next to the amount.  If you use Turbotax Online, you can't make manual adjustments; however, if you use Turbotax Live (the most expensive version) your Live CPA assistant might be able to make the entry for you.

 

#2 State income tax.  You will need to research your state taxes to see how to enter a repayment of wages or claim of right credit.  As there are more than 40 states with income tax, I'm not an expert on how to enter the state tax adjustment but there probably is one.

 

#3. Social security and medicare tax.  To get a refund of the social security and medicare tax that was withheld on the bonus, you will need to file form 843.  This is separate from your tax return and not supported by Turbotax.  You will need to submit copies of paperwork related to the bonus and repayment (contract, demand letter, etc.) and you will need a letter from the employer stating that they will not be adjusting or repaying your social security and medicare tax.  (Of course, if your wages with the employer were more than the social security wage base -- $137,700 -- for the year you received the bonus, then reducing your wages by the amount of the bonus might not have reduced the social security tax you would have paid, so you would only be entitled to a refund of the medicare tax.)

repayment of Sign on bonus

No it cannot have a negative amount ... wait for the W-2 form and see how the employer handled the repayment in the same year of disbursement.  They have until 2/1 to get them out in the mail and/or have them available online.   Make sure they have your current address if you have moved. 

repayment of Sign on bonus

Do Turbo Tax Premier or Deluxe both allow me to itemize deductions and obtain deduction for repayment of bonus for federal and CA State taxes(CA tax was paid on bonus)? Other than this my tax situation is fairly simple with W2 reporting.

repayment of Sign on bonus

Deluxe will be fine. 

repayment of Sign on bonus

So, they issued me a full W2 for my wages. Nowhere, on there is the Repayment reflected. Does that mean that I need to ask for a corrected W2?

If they don't issue me a corrected W2, can I still claim the repayment of bonus on my taxes as I have proof of repayment made through a personal check?

repayment of Sign on bonus


@sockswithsandals wrote:

So, they issued me a full W2 for my wages. Nowhere, on there is the Repayment reflected. Does that mean that I need to ask for a corrected W2?

If they don't issue me a corrected W2, can I still claim the repayment of bonus on my taxes as I have proof of repayment made through a personal check?


The answer was given in detail above.  The employer is not required to give you a corrected W-2; your W-2 accurately reflects the wages you were paid.

 

You can recover the federal income tax on the repaid bonus by making a claim of right credit under IRC 1341 or taking the special claim of right tax deduction.  You can recover the state income tax on the bonus by taking a claim of right deduction on your state tax return.  You can try and recover social security and medicare tax on the repaid bonus using form 843, although the actual recovery you might be entitled to will depend on your total income from all your jobs for the year you received the bonus, and you will need a letter from your former employer stating that they will not be making any adjustments to your social security or medicare tax. 

repayment of Sign on bonus

So, I today I received two W2Cs for 2018 and 2019 from my employer with a boxes 1 through 6 corrected.

First installment of the sign on bonus, $31200, was paid to me in 2018.  On the W2C for 2018 they reduced the wages by $50,000.

Second installment of the bonus $15600 was made in 2019 wholly into a 401k.  On the 2019 W2C they increased my wages by $15600, even though it was made into a pretax 401k plan.

 

 

Repayment of $27,660 was made back to the employer in 2020. I was about 27 % vested into the sign on bonus as per contract.

 

I can't understand the math here as to why they would reduce the 2018 W2C by $50k and increase the 2019 W2C by $15600 even though I had contributed all of the $15600 to a 403b plan.

 

Also,do I need to amend 2018 and 2019 returns as they have issued a W2C for those two years or simply claiming an itemized deduction for 2020 taxes would suffice?

repayment of Sign on bonus

Are you SURE they changed Box 1?  Did they change Box 2?  They were NOT supposed to do that, and if they did, they did it wrong.  You may need to call them and talk to a payroll supervisor about it.

 

The W-2c should only show changes to Boxes 3-6.

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