Sign-on bonus repayment tax adjustment (W2C or IRC 1341)

[marcuscato]

Hello

I had planned on filing a IRC 1341 credit with my 2021 taxes, next year, for the sign-on bonus repayment (see details below). However, my company sent me an email that they will be sending me a W2C in 6 weeks. I was surprised to learn this, given I was told by folks on this community that a W2C is not possible given the payment was made in 2021, not 2020 (the year the sign on bonus was given). Is my company mistaken? If W2C is sent, should I be filing an amendment this year or go with the IRC 1341 credit next year? Are both options available to me?

DETAILS:

• I joined a company in July 2020 and got a sign-on bonus, at the time of joining.
• I left the company in March 2021, before a year was up. Upon my departure, as part of the sign-on bonus agreement, I was asked by the company to pay back part of the sign-on bonus.
• I repaid the bonus clawback in Jun 2021.
• I have already filed my taxes for year 2020 and it has been accepted, but haven't gotten the refund yet because of IRS delays

I need to reclaim the difference in the tax I paid to IRS (*very roughly* $5800) for the bonus.

[Mike9241]

here's what they might be doing which actually conforms to the tax laws. they must file Forms W-2c and W-3c (for the year the bonus was paid) with the SSA to correct social security and Medicare wages and taxes (withheld). they are not supposed to correct wages (box 1) on Form W-2c for the amount
paid in error.

2021 circular E, pub 15, page 38

[marcuscato]

Does this mean I cannot use the W2C to claim the difference with IRS? By the way I need to claim the difference in Federal, NY state, NY City taxes, SSN and Medicare. I have asked the employer to refund me the difference in SSN and Medicare and they said they will if I sign a form that says I won't claim that part from IRS, which I am considering. I am yet to see the form.

[Opus 17]

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@marcuscato wrote:

Does this mean I cannot use the W2C to claim the difference with IRS? By the way I need to claim the difference in Federal, NY state, NY City taxes, SSN and Medicare. I have asked the employer to refund me the difference in SSN and Medicare and they said they will if I sign a form that says I won't claim that part from IRS, which I am considering. I am yet to see the form.

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You are then out 3 types of taxes; federal income, state income, and employment taxes (social security and Medicare.). (4 types of tax if we include NYC, but that will go on the state tax form.).  Normally, you recover the state and federal income tax with a claim of right on your income tax return, and you recover the social security and medicare tax by filing form 853 separate from your tax return. 

The only thing the company can legally do is change the social security and medicare withholding.  That's boxes 3-6.  They can't legally change your box 1 or box 16 taxable wages because those boxes must show what you were actually paid during the year and those amounts did not change.  

If they reduce your box 3 and 5 wages and your box 4 and box 6 social security and Medicare withholding, then they should pay you back the difference.  Otherwise, they are telling the social security administration to credit you for less money than was paid into the system.   If the company refunds the excess social security and medicare withholding, then it's fine to sign a form saying you won't claim the same refund from the IRS, because you won't need to, you will have been refunded the money by your ex-employer.  (And in fact, you can't file a claim on form 853 unless you include a letter from your company saying that they won't refund the excess social security and medicare.). So if the company issues a W-2 that adjusts boxes 3-6 only, and pays you a refund, that makes you whole on the issue of social security and medicare tax, and saves you having to file form 853.  You will still need to file a claim of right on your 2021 income tax returns to take care of the federal, state and city income taxes. 

If the company issues a W-2C for 2020 that changes box 1 and 16, that's a mistake on their part, and we can talk about that if it happens.  

[Mike9241]

the taxable wages on the W-2c SHOULD NOT change. thus your taxable income will not change for 2020. the taxable FICA wages and withholding may change depending on whether or not the overpayment reduces the taxable amount and thus the corresponding withholding. Medicare wages and withholding should drop. 

you can not claim excess FICA withholding from one employer on your tax return. the rule for that is you must get the money from your employer.  There really isn't n excess medicain other words if your gross bonus was $10,000 and the amount was subject to FICA and MEDICARE you likely should only have repaid

$10,000 less FICA of $620 less Medicare of $145 net $9235. 

the company files 941 in 2021 with IRS claiming credit reduced wages of $10,000 which gets them back the portion of FICA and medicare that they pay of your bonus + the amount withheld from your bonus. 

if you repaid the Gross they owe you the FICA and Medicare taxes taken out.

you'll have to wait for the w-2C to see what has been changed. only then can it be determined if they handled the repayment properly

in 2021 you use section 1341 to claim the credit. 

I do not know what NY law says about these repayments.

[marcuscato]

Hello @Mike9241 and @Opus 17 

I was looking at my sign on bonus clawback payment again and looks like I paid the difference in NET amount not GROSS amount. As a made up example of 10K gross sign-on bonus and flat 20% tax and having been there half of the promised time, instead of paying 5K gross back, I paid 8K - 4K = 40K. The 20% had *estimated* federal, state, city, SSN and medicare included. So, at least roughly speaking (given those were estimated taxes etc) I guess I am good without having to file a claim with IRS?

[Opus 17]

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@marcuscato wrote:

Hello @Mike9241 and @Opus 17 

I was looking at my sign on bonus clawback payment again and looks like I paid the difference in NET amount not GROSS amount. As a made up example of 10K gross sign-on bonus and flat 20% tax and having been there half of the promised time, instead of paying 5K gross back, I paid 8K - 4K = 40K. The 20% had *estimated* federal, state, city, SSN and medicare included. So, at least roughly speaking (given those were estimated taxes etc) I guess I am good without having to file a claim with IRS?

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You can still make a claim of right against the $4000 that you repaid. 

[marcuscato]

@Opus 17 can you explain why? I am merely returning the net amount that paid in excess.

Separately, as for the social security tax part, I was looking at my 2020 tax return, schedule 3, line 10 (10 Excess social security and tier 1 RRTA tax withheld) and it has a number in there. I had another employer before this one in 2020, so perhaps between the two of them, I crossed the social security limit of $137,700 for year 2020 and I have already claimed the excess in the return, hence the social security is covered? Am I reading this right?

[alsr71]

@Opus 17 , I have a similar situation. I got a sign-up bonus last year and left the company before the end of the year. I paid back the amount that was not taxed. The company did not return Social Security or Medicare and they are refusing to send a W-2C.

They are saying "Repayment obligations to """""" existed independent of the ability to successfully recoup taxes on repayments from the taxing authorities. I am very sorry but there is nothing """""" can provide". 

Is the company required to provide this per IRS guidelines?

[marcuscato]

The company is not obligated to provide W2C. Though in my case, they did it. Consider filing for IRC 1341 credit instead.

[AmyC]

The company does not have to give you anything. You have your proof of where you paid back the money - a check probably -and can claim the amount. 

Here are your options and how to do it, see What is a Claim of Right Repayment. See also example on page 36 of Pub 525. You will want to determine which is better for you, the credit or the deduction. If the credit is best, you will need to download the desktop version and move your .data file so you can pick right up where you left off.  In addition, you may need to file Form 843 for Medicare and Social Security taxes to be refunded, also on page 36, third column.

See also:  How to download TurboTax Desktop software from TurboTax.com

@alsr71

@marcuscato  If the excess FICA taxes were greater than or equal to the amount taken for the extra wages, then you are even. Otherwise, there may be some additional amount due.

[Opus 17 · Accepted solution]

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@alsr71 wrote:

@Opus 17 , I have a similar situation. I got a sign-up bonus last year and left the company before the end of the year. I paid back the amount that was not taxed. The company did not return Social Security or Medicare and they are refusing to send a W-2C.

They are saying "Repayment obligations to """""" existed independent of the ability to successfully recoup taxes on repayments from the taxing authorities. I am very sorry but there is nothing """""" can provide". 

Is the company required to provide this per IRS guidelines?

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Your W-2 reflects the wages you were actually paid.  If you and the company had agreed to withhold your final paychecks to account for the bonus, then your W-2 would reflect the net pay and you would not have a repayment situation.  However, if they paid your full salary, and you repaid them the bonus separately, then the W-2 is correct and can't be changed, and you handle the repayment issue via a claim of right credit or special tax deduction.  

The claim of right credit will take care of the federal income tax.  There is probably a similar credit for your state tax return, but I: don't know the laws of all the states, you will need to do some research.  To get a refund of social security and medicare tax on the bonus, you will need to file a form 843 with the IRS.  This is not part of your income tax return and can be filed at any time.  You will likely need a letter from the company confirming that they will not be issuing a refund of social security or medicare taxes directly to you.