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Employer offer $10,000 retention bonus with stipulation. The

bonus is counted as income...
Employer offer $10,000 retention bonus with stipulation. The bonus is counted as income and taxed as such. Employee must agree to stay with the company until August 1st 2014, if the employee leaves the company before Aug 1st the employee must return/-repay the employer the $10,000 bonus in full.

Employee decides to leave the company before Aug 1st so employee has to return the retention bonus to the company in full. Question, what's the tax implication? The retention bonus that is returned back to the employer in full, does the employee recover the tax amount that was taken by the IRS? How does the employee file this loss of income since the retention bonus had to be return to the employer?

Thank you,
Unsure Employee
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Answered in 6 minutes by:
10/18/2013
Arthur Rubin
Arthur Rubin, Tax Preparer
Category: Tax
Satisfied Customers: 1,561
Experience: 22 years of tax preparation experience, including individual, trust, and estate returns.
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Arthur Rubin :

Thank you for using Just Answer.

Arthur Rubin :

This is actually fairly well described in IRS documents, once you know what you're looking for.

Arthur Rubin :

The employee can deduct the repayment under the "claim of right" provisions.

Customer:

Hi

Arthur Rubin :

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.

Arthur Rubin :

If the repayment is in the next year, the employee has to return the gross amount, and has the following options:

Arthur Rubin :

1. Deduct the payment as a miscellaneous deduction not subject to the 2% limit, or

Arthur Rubin :

2. Recalculate his 2013 taxes as if the payment were not made, and take a credit for the difference on his/her 2014 taxes.

Customer:

The contract agreement that the company impose is for the me/employee to repay the bonus in full the net amount

Customer:

The bonus will be in the same year, the bonus will be give in mid January 2014

Customer:

I will need to stay with the company until Aug 1st

Customer:

If I leave before Aug 1st then I have to pay back the bonus

Customer:

Are there IRS tax docs that I read about this?

Arthur Rubin :

If the recapture is in the same year as payment then employment taxes (such as FICA) need to be returned to the taxpayer.

Customer:

I am not sure what FICA is

Arthur Rubin :

If the repayment is in a different year, then the "claim of right" provisions noted in Publication 17 and Publication 525 apply.

Arthur Rubin :

FICA = Social Security + Medicare taxes

Customer:

Got it, the bonus will be given in mid January 2014

Customer:

So I have to stay at the company from Jan 2014 to Aug 2014

Customer:

if I leave before Aug 1st 2014 I have to give back the bonus

Customer:

This info is helpful because I am not sure I want to stay with the company until Aug 2014

Customer:

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

Customer:

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

Arthur Rubin :

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).

Arthur Rubin :

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.

Customer:

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?

Customer:

Or in simple, will I come out of this with further financial loss?

Arthur Rubin :

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


not offset the repayments against current-year wages un-

less the repayments are for amounts received in error in

the current year.

Repayment of current year wages.

If you receive re-

payments for wages paid during a prior quarter in the cur-

rent year, report adjustments on Form 941-X to recover in-

come tax withholding and social security and Medicare

taxes for the repaid wages.

Sorry about the formatting: the publication uses 3-column format in its PDF file.
Customer:

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

Arthur Rubin :

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.

Customer:

These statements are more understandable to me

Customer:

Last request, are there supporting IRS docs I can read about that statement?

Arthur Rubin :

I'm still looking. IRS Publication 15 (p. 34 in the 2013 edition) has the quote I copied above, as instructions to the employer.

Arthur Rubin :

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.

Customer:

Okay, I was hoping for supporting docs about these statements but I guess this would have to do...

Customer:

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

Arthur Rubin :

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.

Customer:

Thanks.

Arthur Rubin
Arthur Rubin, Tax Preparer
Category: Tax
Satisfied Customers: 1,561
Experience: 22 years of tax preparation experience, including individual, trust, and estate returns.
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