I overpaid back an overpayment in 2020 to my employer

[kuapao]

My employer miscalculated an overpayment made to me in 2020. I have been struggling to find the right words to describe my scenario.

My employer payroll department asked me to pay back $5k, which I did in the same year Dec 2020. When I asked them to re-analyze the overpayments later on in Jan 2021, they discovered I only needed to pay them back $1k. So, they sent me a payslip in March 2021 reflecting $4k gross from which they withheld taxes and applied a portion of it to my 401k (which was what I had setup for normal earnings).

Questions:

1) Do they need to give me a 2020 corrected W2? I want to make sure I do not get charged tax for the $4k that should not have been repaid by me in the first place. That was money in my savings that came from previous years' earnings that were already taxed. I don't want to be double taxed.

2) How can I make sure that for year 2021, I don't get taxed on the $4k, either? It's not wages... Should I expect a 1099 MISC, instead of a W2?

Thank you.

[KathrynG3]

1. The 2020 Form W-2 should include the $5,000 pay back and therefore be $5,000 lower than it would have been, and therefore, the tax should have been reduced, as well. And yes, if that did not occur, Form W-2 for 2020 should be corrected.  

2. For 2021, if the 2020 Form W-2 was not accurate because the tax was not reduced, then, file Section 1341 Claim of Right as either a deduction or a credit, whichever applies best to your circumstances.

If you will claim the standard deduction in 2021, then use the credit approach.

• To enter a deduction in TurboTax Online when itemizing deductions: 
  • From the left menu, select Federal.
  • At Deductions and Credits, scroll down to Other Deductions and Credits and click Show more.
  • Other Deductible Expenses click Start
• To enter a credit, use TurboTax CD/Download.
  • Go to Forms Mode. Scroll down to 1040/1040SR Wks to Line 11. This is where the amount of tax from Schedule 3, Line 12d under Other will be entered. See the screenshot from 2020 for reference.

See page 100 for 2020 Schedule 3, Line 12d instructions, for reference before 2021 Form 1040 instructions are published next year.

You may also want to verify compliance for the 401(k) limits which is $19,500 annually for both 2020 and 2021 if your contribution amount will be affected. See: IRS: Retirement Topics - 401(k) and Profit-Sharing Plan Contribution Limits

[kuapao]

I was able to "pay back" (albeit the wrong amount) the overpayment in my wages in December 2020, before they issued the 2020 W2. So, my HR says they will not need to issue a corrected W2.

I agree, I effectively paid less tax in 2020 because my earnings were reduced by $4k. How can I fix this in my 2020 tax return? I am thinking I should include $4k as Other Income in 2020 tax return, and plan on Deduction of $4k from my 2021 return?

This is very confusing. My apologies if I am not understanding.

[npierson7]

You employer has to correct your W-2. If they contributed the $4,000 to your 401k plan for 2020, it must be shown on your W-2. Don't try to correct it yourself by entering it as Other income or in any other way. It will only make it more confusing.