How do I handle a repayment of a signing bonus?

[jmacuna22]

I started a job in May 2017 and was awarded an $8K signing bonus but only received $4.5K after taxes. I left the job in September 2017 and was asked to repay the full $8K, meaning $3.5K was paid out of pocket. Since it was done the same year, I don't think that I can do a "claim of right repayment".

My current W-2 shows the $8K as part of my wages (Box 1). Should that $8K be part of my wages if I paid it back? I contacted my employer about getting a corrected W-2 and they said they were unsure and would get back to me.

I also read somewhere that they should file a 941. If this is the case, how does that affect my taxes?

Will I receive my out of pocket $3.5K back?

Please help.

[Opus 17 · Accepted solution]

You can't use claim of right if it happened in the same year as best I understand it.  The company needs to correct box 1 of your W-2.  They won't correct box 2 since that represents the money you already had withheld.  They may or may not be able to correct boxes 3-6 but if they do, that's money they have to refund to you, it doesn't come back in your tax return.

Part of the company's process to correct this is to file amended form 941s with the IRS (they file a quarterly form 941, you don't get involved in this.)

If they refuse to correct the W-2 there is a process to file your return anyway but it will likely involve getting the IRS to notice both you and them, so better to wait and give them a chance to fix it.

[PrCoor2020]

We have an employee that received a $2000 sign on bonus in 2019. He owes the company back a prorated portion of $843.84. If we adjust the employee's last paycheck by that amount would this comply with IRS regulations? Would there be anything that we would need to do regarding 2019 taxes/w-2?

[JamesG1]

If the employee’s last paycheck details the deduction, then the employee has certainly deducted the amount from income in the year of repayment.

However, since the amount repaid was under $3,000, the employee will no longer be able to claim a miscellaneous itemized deduction because of the changes under the 2017 Tax Cuts and Jobs Act.

See this statement in IRS publication 17, Repayments, page 89

“Beginning in 2018, you can no longer claim any miscellaneous itemized deductions, so if the amount repaid was $3,000 or less, you are not able to deduct it from your income in the year you repaid it.”