Paid back my sign-on bonus, got W2-c for 2021, but now TurboTax says I owe federal taxes

[LeoNYC1]

I had to pay back 25K in the sign-on bonus earlier this year: the bonus I received in 2021 because I left the company before 1 year was out.

The company sent me the W2-c form with the adjusted FICA taxes and withholdings (all were reduced, social security and Medicare waged reduced by 25K, as expected). 

I assumed that would result in the refund back to me for the Medicare and Social Security taxes I paid on that bonus. Instead, TurboTax is showing that I owe over $1300 in federal income tax. How can this be? Not only I paid back 25K, now I owe even more money to Uncle Sam?

[Critter-3]

Look at the 1040X carefully ... it is very possible that a reduction of the income can also reduce credits (refundable and non refundable).  

Look at the form 1040X …

Column A should have the figures from the original return, Column C the corrected figures and Column B the differences between the other 2 which needs an explanation on page 2 of the form 1040X.

If you completed it correctly you will see an entry on either line 16 OR 18:

On line 16 should be the amount you paid with your original return. If you paid nothing already then this line should be zero.

On line 18 should be the amount of your original refund you received.  If you have not received your refund yet then you need to wait for it.  If the refund changes from what you expected then this line must reflect that change.

Then you will see your extra refund on line 22 OR  the new balance due you need to pay on line 20.

[LeoNYC1]

Thanks so much! I do see this calculation. But then shouldn't the employer return back to me the excess Medicare and Social Security taxes that I paid on the bonus that I have returned?

It is just strange that I return back the gross bonus payment and end up owing even more in taxes to the government?

[Mike9241]

you should not have repaid $25K if that was your gross bonus. you should have repaid basically the net amount you got which would be the gross bonus less fica, medicare and withholding taxes then it's like you never paid them in the first place.  under the tax laws, the wages on the w-2c should not change. so you owe income taxes in 2021 on those wages.  to recover those income taxes you use IRC code section 1341.  you go back to 2021 and recompute your taxes by reducing the wages by $25K.  then in 2022, the year of repayment you claim a tax credit for the reduction in 2021 taxes. the decrease in taxes is taken as a credit on Schedule 3 line 12d denote as IRC 1341.

an example:

you got paid a net of $15K on the bonus in 2021

repaying $15K in 2022 nets to zero. at this point your even.

however, you owe taxes on the $25K for 2021 say $7500

you get that $7500 back in 2022 as the IRC 1341 credit.

so this nets to zero and you are even.

of course, this may affect other items on your 2021/2022 returns 

some companies handle it differently in that they only require repayment of the gross less fica and medicare and let you keep the withholding.

an example

income tax withholding was $7500

you actually got a  net of $15K

but now have to repay $22.5K

 you now don't owe taxes on the $25K in 2021

and you get back the $7500 in 2022 as the 1341 tax credit.

[Opus 17]

With all due respect to my colleagues, I think there is some confusion here, and the advice you are being given does not reflect what should actually be happening.  Generally, you would not even file a 1040-X.  A repayment in 2023 is handled in 2023, not by amending 2021.  What happened in 2021 is what happened, and the 2021 tax return is filed on the basis of what actually happened in 2021, not what happened later.

The only thing your employer is supposed to do on the W-2C is change the amount of medicare and social security wages and taxes (boxes 3-6).  They can't change your box 1 wages because you were paid in 2021 what it says you were paid in 2021.  The repayment is handled as an adjustment on a later tax return, not as a correction to 2021. (And if they changed box 3-6, they are supposed to refund that to you.)

So let's start from the beginning and try to clarify this.

• You repaid $25,000 when, 2022 or 2023?
• What boxes were changed on your 2021 W-2C? 
• If they changed boxes 3-6, did they refund the difference to you?
• Was your original taxable compensation more than $142,800?
• Was your 2021 compensation still more than $142,800 after taking the repayment into account?