@JJoli wrote:
But I already paid tax on the sign on bonus and post tax I got less than half of it. My salary and the sign on are entirely different things. I thought the whole point of reporting the sign on repayment on tax return is to recover the taxes I already paid for the sign on bonus. when I pay back the prorated sign on (the pre-tax amount prorated) after working for 12 months it would be a higher amount than what I had received post-tax (which is quite ridiculous). So I’d be paying back more than what I had received in total since they gave me the post-tax amount of the sign on.
That's why its better to get the employer to reduce your salary instead, and that't what the IRC 1341 claim of right credit is.
Suppose the bonus is a gross of $10,000. Your actual take home might have been around $6000 (even in California, you would probably pay 24% federal, at most 10% state, and 7.65% social security and medicare, which is 42% more or less.). Withholding might have been more, but the real impact on your tax return would have been those percentages at your tax bracket and if you were over-withheld, it came back in your refund.
So you grossed $10,000 and paid let's say $2400 in federal tax, $1000 in state tax and $765 in social security and medicare.
Now you repay $10,000 (the gross amount). On your federal tax return you claim an IRC 1341 claim of right credit for $2400, that reduces your tax for 2020 or increases your refund. You take a similar claim of right credit on your state tax return for $1000, which reduces your state tax or increases your refund. Now at worst, you are just out the $765 in social security and medicare tax. There is no way to get that back on your tax returns. Someone here once mentioned a form their accountant submitted directly to the social security administration, but I don't know anything about that. If you can't get it back, then at least it stays in the social security system and adds to your disability and retirement credits.
A smart and generous employer would let you pay back just $9235 instead of the full $10,000, so you are made whole on the social security and medicare tax as well, but whether or not it is required would depend on your contract and maybe state law.
On the other hand, suppose your employer reduces your gross salary by $5000 a month for the last two months. Because your salary is lower, your income tax withholding will be lower as well as your social security and medicare tax. The end result would be the same as if you got no bonus, but got paid your last 2 month's salary when you were hired instead of when you quit.
Suppose your salary is $10,000 per month and your bonus was $10,000, and you worked from 7/1/2019 to 6/30/2020. With no bonus and no repayment, you would gross $60,000 in 2019 and $60,000 in 2020. With a bonus that was repaid with a salary reduction, you gross $70,000 in 2019 and $50,000 in 2020, and both ways your net after taxes is around $70,000. Comes out the same in the end. If you instead repay the bonus separately, you gross $70,000 in 2019 and $60,000 in 2020, with a net of maybe $75,000. Then you repay $10,000 gross (take you down to $65,000), and get $3400 in tax credits, bringing your net back up to around $68,400. Almost but not quite made whole. (My numbers are crude and sloppy. If you use the claim of right credit on both your federal and state return, you are only "out" the social security and medicare tax on the bonus.)
