Sign On Bonus Repaid (2022)

[YadavShradha18]

I got bonus of $25000 (sign on + relocation) in 2022. I repaid the bonus excluding Medicare taxes and SS. taxes during same tax year (before may 2022).

My ex-employer sent me W2-C changing box 3,5,6, and 4. 

How can I reclaim my federal tax deduction and state(NY) tax deduction ?

Thanks in advance.

[Texas123]

If you have already filed your return, file an amended  tax return for both federal and state.  You'll get an refund due.

[YadavShradha18]

No, I have not filed my return. I am still confused how to fill form to get money back.

[Mike9241]

box 1 should not have included the $25000 since you repaid it in the same tax year. IRC sec 1341.

if that's not been done you need to get a revised w-2c. if your w-2c reflects box 1 net of the $25,000

what you do with the original w-2 is enter everything but boxes 1,3,4,5,6, for those boxes you use the w-2c amounts. also check off that it's a corrected w-2.  you get back the excess withholding by filing your federal and state returns.

[Opus 17]

The tax procedures that exist for this situation only apply if the repayment occurred in a different (future) year from the payment of the bonus.   If the bonus and repayment occurred in the same year, the employer is supposed to net it out on your W-2.  They can't correct box 2, since that was what was originally sent to the IRS in your name.  But they should change box 1, and when you report lower wages, you would get a refund of the excess tax withheld.

The same answer applies to state income tax. 

If they adjusted box 3-6, they should directly pay you (refund to you) the adjusted amount of medicare and social security taxes.

Contact them and explain that since the wages were repaid in the same year, they are supposed to net it out in box 1.  If they refuse, you can use what's called a substitute W-2 form to report the adjusted amount.  But this may delay your refund and the IRS may ask for proof, so make sure you keep all your records including the bonus, repayment, and all your correspondence with the employer. 

[YadavShradha18]

Hello Opus17, 

Thank you for your reply, just to make myself clear, I made an error. I got money ($25000) in December 2022 and returned it in March 2023. They gave me W2 and W2-c together in april 2023.

Should I contact them for fixing it up or I have to do something else.

[Opus 17]

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@YadavShradha18 wrote:

Hello Opus17, 

Thank you for your reply, just to make myself clear, I made an error. I got money ($25000) in December 2022 and returned it in March 2023. They gave me W2 and W2-c together in april 2023.

Should I contact them for fixing it up or I have to do something else.

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That makes a big difference.

Your box 1 wages and box 2 withholding can't be changed because that's what you were actually paid and actually had withheld in 2022.  If they changed your box 3-6 to show less social security and Medicare tax withheld, they should refund you the difference. 

When you have repaid wages, you claim a deduction or credit on your tax return for the year you made the repayment.  Since the repayment was made in 2023, you will pay taxes in 2022 on what you were actually paid in 2022, then you will claim a deduction or credit for the repayment when you prepare your 2023 return.

There are two methods.  You are allowed to chose which method you use, if one gives you more money than the other.  The repayment must be more than $3000, if the repayment is less than $3000, there is no deduction or credit, you are just stuck.

Method 1 is to claim a special itemized deduction not limited by the 2% rule, for the amount of repayment.  You can do this in any version of Turbotax.

Method 2 is to claim a special tax credit called an IRC 1341 claim of right credit.  If you already itemize your deductions (for mortgage, charity and so on) and your income is about the same in both years, both methods will be about the same.  If you don't normally itemize your other deductions, you should use the credit method.

To claim the credit, you must be using Turbotax installed on your own computer from a CD or download. Switch to Forms mode and make a manual entry on schedule 3, line 13z, with the notation "IRC 1341" next to the amount.

To calculate the amount of the credit, you recalculate your 2022 tax return as if you had not received that money, and see how much less your income tax would have been. 

To get a state income tax adjustment, you would make a claim of right on your state return as well.  Exactly how and where to do that will depend on your state.

One final note:

You can use the special itemized deduction method no matter why you left the job.  However, you can only use the IRC 1341 tax credit method if you had a reasonable belief at the time the wages were paid that you had an unrestricted right to the wages.  For example, if the bonus was contingent on staying with the employer for 3 years but you were already planning to look for a different job when you signed the contract, then you did not have a reasonable expectation that the bonus was unrestricted.  If audited, you might be asked to prove that you had an unrestricted right to the wages at the time you received it.

[YadavShradha18]

Thank you OPUS 17. One last question.

So when I file 2023 tax return I will follow one of the two methods mentioned by you. Will I be able to get all my deducted tax on bonus back in 2023? it was more than $3000.

[Opus 17]

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@YadavShradha18 wrote:

Thank you OPUS 17. One last question.

So when I file 2023 tax return I will follow one of the two methods mentioned by you. Will I be able to get all my deducted tax on bonus back in 2023? it was more than $3000.

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More or less, yes, but it's based on your income and your tax.  Withholding is only an estimate, and it might have been high or low to begin with, and that will affect whether the numbers line up exactly correctly.

The tax on a $25,000 bonus would be anywhere from $3750 to $9000, depending on your other income, and the mandatory withholding should have been 25%, or $6250, not $3000, so the numbers already don't quite line up.

Very briefly, supposing you report $100,000 of income in 2022, that includes the bonus, and your federal income tax is $20,000 (form 1040 line 24) is $18,000.  You would recalculate your 2022 tax return as if the bonus was not paid ($75,000 of income).  Maybe the tax on that is $13,000.  That $5000 difference is the credit you can claim on your 2023 return, which will come back to you as a refund assuming your other taxes, withholding and credits are mostly balanced.  The amount of the extra refund in 2023 might or might not be the same as the extra tax you paid in 2022 or the extra withholding, because there are a lot of moving pieces that all have to work together.  But the point is that with Method 2, whatever extra tax you paid in 2022 is treated as a credit in 2023.

[Texas123]

If the OP received W2-c for 2022, shouldn’t the OP use that info for 2022 taxes; whether it’s an original or amended return?  Any overpayment of SS or taxes will be refunded by the feds.  If 2022 wages don’t align on the 2022 tax return with what’s been reported by the employer, the OP will hear from the IRS, correct?

We have overpaid SS and State tax in the past due to relocation and were refunded by both government agencies.  This year we had a W-2c and I filed that along with our W-2 on turbo tax.

[Opus 17]

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@Texas123 wrote:

If the OP received W2-c for 2022, shouldn’t the OP use that info for 2022 taxes; whether it’s an original or amended return?  Any overpayment of SS or taxes will be refunded by the feds.  If 2022 wages don’t align on the 2022 tax return with what’s been reported by the employer, the OP will hear from the IRS, correct?

We have overpaid SS and State tax in the past due to relocation and were refunded by both government agencies.  This year we had a W-2c and I filed that along with our W-2 on turbo tax.

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OP has also specified here or in a private message to me that box 3-6 were corrected but not box 1 and 2.

The employer can't change box 1 and 2.  Those are the actual wages paid and actual withholding collected in 2022 and are not changed by the repayment of the bonus in a future year.  The employee recovers the excess income tax on the repaid wages using the claim of right procedure which is reported on their tax return for the year in which the repayment actually happened.  (The same is true for state wages and withholding in box 16 and 17.)

Social security and Medicare wages and taxes are handled separately and there are two different ways the employee can get a refund.   In one case, the employer can simply refuse to make any adjustments to the W-2.  In that case, the employee applies separately to the IRS for a refund, using form 843.  They generally need a letter from the employer confirming that the wages were repaid and the employer will not be adjusting the social security and medicare taxes.  That allows the employee to ask for an adjustment from the IRS.   Or, the employer can adjust the box 3 and box 5 social security and medicare wages to reflect the wage repayment, which will result in a reduction of box 4 and box 6 social security and medicare taxes, that the employer must refund to the employee.  (The employer does this by filing an amended form 941 reporting the adjusted wages and taxes and claiming a refund from the social security administration which they pass on to the employee.)

In the hybrid situation where the employer corrects box 3 and 5 but does not correct/refund box 4 and 6, the employee would apply for a refund using form 843 but again, they need a letter or statement from the employer confirming that the employer will not be refunding the excess social security and medicare taxes.

Of course, if the employee's wages after considering the repayment are more than the social security wage base ($147,000 for 2022), the employee would not get a refund of social security taxes.