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How to handle bonus payback taxes and a new job with 1040-ES?

Last year, I started a new job that had a sign-on bonus requiring 2 years at the company. A couple months ago, I left that job just before a year of being there to take a fellowship position. Upon leaving my previous job, I had to pay back the proportionate amount of that sign-on bonus, including the amount that had already been withheld for taxes by the company.

I have seen a few questions on here regarding how to get back the taxes on the repayment and have an idea of how to do that (deduction since the amount is under $3000). However, with my fellowship position, I have to do estimated taxes. 

My question is, is there a way for me to utilize that deduction for my estimated quarterly taxes? Meaning, since ~$3000 is owed back to me, do I need to make quarterly tax payments? 

I was planning on just making quarterly payments and waiting until my tax refund for everything to even out, but if there is a way to handle it now that would be great. 


Please let me know your thoughts, and if you need any clarification!

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10 Replies

How to handle bonus payback taxes and a new job with 1040-ES?

Ask that employer if your 2018 W-2 will reflect the repayment.

How to handle bonus payback taxes and a new job with 1040-ES?

Thank you, I have and am waiting for a response. If they do give me a W-2C or a W-2 that reflects that repayment, will that cover the amount owed to me or do I need to claim a deduction?

How to handle bonus payback taxes and a new job with 1040-ES?

If the W-2 is correctly done, that should cover it.
rjs
Level 15
Level 15

How to handle bonus payback taxes and a new job with 1040-ES?

If they give you a W-2C for 2017, you would have to file an amended return (Form 1040X) for 2017 to show the reduction in income. That would take care of everything, and you would not claim a deduction or make any other adjustment for 2018.

If they reduce the income on your 2018 W-2 by the amount you repaid, that would also take care of it, and you would not claim a deduction or make any other adjustment. That is not really the right way to do it, because you are repaying income that you received in 2017, not income that you received in 2018. But if they do it this way, I would just go along with it.

How to handle bonus payback taxes and a new job with 1040-ES?

I agree, especially as the repayment triggering event didn't take place unril 2018.
rjs
Level 15
Level 15

How to handle bonus payback taxes and a new job with 1040-ES?

From what you wrote it's not clear whether the amount you have to pay back is less than $3,000, or the tax on the repaid amount is less than $3,000. The tax treatment depends on the amount that you have to repay, not the amount of tax involved. Please clarify exactly how much you have to repay. An approximate amount ("~$3000") is not good enough because $3,000 is the dividing line.

The tax reform law eliminated the deduction for a repayment of $3,000 or less for 2018 through 2025. So if you are repaying $3,000 or less in 2018, you get no deduction and the repayment will not make any difference in your 2018 taxes. It's the year of the repayment that matters, not the year that you received the bonus.

If you are repaying more than $3,000, you can claim an itemized deduction for the amount that you repaid. However, this will not make any difference in your tax unless your total itemized deductions are more than your standard deduction. The new tax law also increased the standard deduction. For a single person under 65 the standard deduction is $12,000 for 2018.

You are going to hear about another method of handling the repayment, by claiming a tax credit under IRC Section 1341 instead of an itemized deduction. But the IRC 1341 tax credit can only be used if, in the year you received the bonus, you reported it as income "under a claim of right. This means that at the time you included the income, it appeared that you had an unrestricted right to it" (quotation from IRS Publication 525, page 34). But you do not have a claim of right because it did not appear that you had an unrestricted right to the income. You knew at the time you reported it that you would have to repay part of it if you left the company before two years. That's a significant restriction on your right to the income. Therefore you cannot claim the IRC 1341 tax credit.

Note that none of these options has anything to do with the amount of tax that was withheld from the bonus.

If you know that you will be able to claim the itemized deduction for the repayment, you can reduce your estimated tax payments by the amount that the deduction will save on your taxes. If you will not be able to claim the itemized deduction, either because the repayment is $3,000 or less or because you do not have enough other itemized deductions to exceed your standard deduction, then the repayment is not going to reduce your tax, so you should not make any adjustment in your estimated tax payments.


How to handle bonus payback taxes and a new job with 1040-ES?

Hi, thanks for the response! Let me try to clarify a bit, it was a lot of information to get across and I tried to oversimplify. In September 2017 I received $15,057.40 as a sign-on bonus, agreeing to either work for two years, or repay a proportionate amount. After taxes, I got $9999.46 of this amount. I quit in July of 2018 and was asked to pay $8353.76 back to the company, which was the proportionate amount of the total $15k bonus amount. When taking taxes into account, only $5547.65 was owed to the company, so there was a difference of $2,806.11.
rjs
Level 15
Level 15

How to handle bonus payback taxes and a new job with 1040-ES?

The amount of tax that was withheld from the bonus doesn't matter. Your bonus was $15,057.40. That amount should have been included in the wages in box 1 of your W-2 for 2017, so that's the amount of additional income you reported on your 2017 tax return.

I don't understand "taking taxes into account." When you repaid part of the bonus, you wrote a check to company. Did you pay them $8,353.76 or did you pay them $5,547.65? The amount that you actually paid to the company is the amount of your repayment. It doesn't matter how you or they calculated the amount, or whether, in your mind, there is some adjustment for taxes.

Let's put off any further discussion of what to do until you find out whether the company will be issuing a W-2C for 2017 or making an adjustment for the repayment on your 2018 W-2.

How to handle bonus payback taxes and a new job with 1040-ES?

Hi again. Finally got a response from my previous company. They provided me with a letter confirming that I payed them back the $8k.... but does that help me at all? I might have to just wait until they generate the W-2 for the year to see if they include an adjustment for the repayment.

This is one of the threads I've referenced (of many similar ones on this forum) that is leading me to believe I can put this down as either a deduction or a credit: <a rel="nofollow" target="_blank" href="https://ttlc.intuit.com/questions/3359139-my-story-is-last-year-i-joined-a-comp-and-they-gave-me-a-s...>

Which brings me back to my original question of if I have to wait until I file my taxes early next year to account for the payback, or if I can leverage the amount that I believe I can deduct for my quarterly tax payments?

Thank you so much for trying to help me, I am completely lost in the world of taxes so I appreciate the guidance.
rjs
Level 15
Level 15

How to handle bonus payback taxes and a new job with 1040-ES?

At this point you don't know if you will have any deduction at all on your 2018 tax return. There are multiple possible scenarios where you will not have the deduction. Therefore it would be a mistake to reduce your quarterly estimated tax payments on the assumption that you will have the deduction. You could end up with a big tax bill plus penalties when you file your 2018 tax return. Your original plan to wait "for everything to even out" is the best approach.

The letter you got from the company might be useful in the future if you claim the deduction and the IRS later questions it. But the letter is useless for deciding whether you can adjust your quarterly tax payments, because it doesn't tell you how they are going to report the repayment.

In the thread from two years ago that you referenced, the OP never actually said whether he knew at the time he received the bonus that he might have to pay it back under certain circumstances, but it's extremely unlikely that he did not know. If he did know, then the information that Hal_Al posted about the credit is mistaken. He could not claim the IRC 1341 credit for the same reason that you can't, as I explained above. He did not report the income "under a claim of right."

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