I had a loan forgiveness check given from work and no 1099 done by my employer but I claimed the income on my 2015 income tax, employer now wants to charge me taxes, why?

[fvipe]

The empolyer realized their mistake and now wants to charge me for the interest on that same income, how can I avoid excess charges from them?

[Opus 17]

I don't think I understand your question, and the reference to "interest" is especially confusing.  Can you give more information -- what was forgiven, what money were you paid, and what does the company want to do now?

[SweetieJean]

Was this a 401(k) loan, or a loan that the employer made to you?

[VolvoGirl]

How did you report it without a 1099?  Did you put it under 1099 Int for interest or 1099R like a 401k distribution?  If your employer wants you to pay it back that's probably just between you and him.

[dmertz · Accepted solution]

A loan made to you by your employer and subsequently forgiven (or any money given to you by your employer to pay some other loan) is a fringe benefit to you, the amount of which should have been (or will be) reported to you on a Form W-2 and should have had income taxes, Social Security taxes and Medicare taxes withheld.  It's effectively the same as your employer giving you a bonus which you subsequently use to pay back the loan.  It seems likely that your employer is asking for an amount back equal to the amount that the employer should have withheld for those taxes.

Since you included this income on your 2015 tax return, this apparently occurred in 2015 and your employer will probably be giving you an additional 2015 Form W-2 that you'll need to include on an amended 2015 tax return.  You'll enter this additional Form W-2 and delete whatever entry you made originally reporting this loan-forgiveness income.  It's also possible that your employer will issue a Form W-2C to correct the original 2015 Form W-2 that your employer gave to you, rather than giving you a second From W-2 reporting only the loan-forgiveness amounts, in which case you'll need to delete whatever entry you made originally reporting this loan-forgiveness income and modify the W-2 entry that you originally made to reflect the corrected amounts shown on the Form W-2C.  You'll want to confirm with your employer the method by which your employer will be reporting the correction so that you can either amend your 2015 tax return or report the claim of right deduction on your 2016 tax return.

The amount of tax withheld, shown on either the additional Form W-2 or the corrected amounts on the Form W-2C, will be credited toward the tax liability calculated on the amended tax return.

[dmertz]

I've edited my answer slightly.

[dmertz]

One other thought:  Perhaps the employer is suggesting as an alternative, in lieu of you paying back to the employer the amount of tax that should have been withheld, the amount that should have been withheld for taxes, which will be shown as withholding on the additional W-2 or correction on the W-2C, be considered to be a portion of the loan that is still outstanding and on which interest is due.  Perhaps that is where the mention of interest comes from.  The money credited to you as withholding is effectively money that is given to you, so you either need to give it to the employer to completely satisfy the loan or have that portion of the loan remain unsatisfied.