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This is actually fairly well described in IRS documents, once you know what you're looking for.
The employee can deduct the repayment under the "claim of right" provisions.
If the repayment is in the same year as the original payment, the employee should only return the net payment (less withholding and taxes), and it should disappear from the employee's W-2.
If the repayment is in the next year, the employee has to return the gross amount, and has the following options:
1. Deduct the payment as a miscellaneous deduction not subject to the 2% limit, or
2. Recalculate his 2013 taxes as if the payment were not made, and take a credit for the difference on his/her 2014 taxes.
The contract agreement that the company impose is for the me/employee to repay the bonus in full the net amount
The bonus will be in the same year, the bonus will be give in mid January 2014
I will need to stay with the company until Aug 1st
If I leave before Aug 1st then I have to pay back the bonus
Are there IRS tax docs that I read about this?
If the recapture is in the same year as payment then employment taxes (such as FICA) need to be returned to the taxpayer.
I am not sure what FICA is
If the repayment is in a different year, then the "claim of right" provisions noted in Publication 17 and Publication 525 apply.
FICA = Social Security + Medicare taxes
Got it, the bonus will be given in mid January 2014
So I have to stay at the company from Jan 2014 to Aug 2014
if I leave before Aug 1st 2014 I have to give back the bonus
This info is helpful because I am not sure I want to stay with the company until Aug 2014
I want to if the taxed amount on the bonus is recoverable but you're telling I just need to pay back the post tax amount of the bonus rather than the full $10,000
I want to know if the taxed amount on the bonus is recoverable but you're telling I just need to pay back the post tax amount of the bonus rather than the full $10,000
OK; if the repayment is in the same year, the IRS publications are not particularly helpful; but the employer needs to put you in the same position as if the payment was never made; in others words, you must repay the net amount (the full $10,000, less, at least FICA and Federal withholding).
That's not quite correct if your Social-Security-eligible income in August is more than the $107K limit, but, basically, the amount of Social Security and Medicare taxes you pay by the end of the year must match your total income disregarding the repaid bonus.
This all sounds to complicated, I have to give the company back $10,000 less at FICA? how do I determine the less FICA part? this whole thing, sounds like I give the company back $10,000 but what about the tax that was originally taken out of the bonus amount from the IRS? Can I recover that tax amount?
Or in simple, will I come out of this with further financial loss?
I found some instructions for the employer in IRS Publication 15 (2013, page 34):If an employee repays you for wages received in error, do
Man this tax stuff is no joke, i don't follow. I a simple concern. If I have to pay the company in full net $10,000. what about the tax amount that the IRS took, do I recover that taxed amount? Sorry that it seems like I repeating but the answer provided at the moment is not clear to me
In general, you should recover from the company FICA taxes, Federal withholding, and possibly state employment taxes and withholding. If you don't recover the withholding, for some reason, it's allowable toward your 2014 taxes due in April 2015, and you'll get the money back then.
These statements are more understandable to me
Last request, are there supporting IRS docs I can read about that statement?
I'm still looking. IRS Publication 15 (p. 34 in the 2013 edition) has the quote I copied above, as instructions to the employer.
I'm afraid I don't have anything about withholding; it just seems obvious (as a tax preparer with over 20 years work) that if you aren't refunded the withholding, it's still there, and usable against your taxes.
Okay, I was hoping for supporting docs about these statements but I guess this would have to do...
I just don't want this to come back to haunt me when I take the bonus offer then leave the company before the retention date
I think I recall a PLR (Private Letter Ruling) in regard a sports player's fine. If I can find it, I'll add a comment here, even if after you rate the answer.