Tax recovery for repayment of signing bonus

Your Guide to State, Local, Federal, Estate + International Taxation

We are in unprecedented times and not entirely sure how we got here, but the job market is ‘hot’ ???? ???? ????!!! You may have heard or been a part of it or still are, but the Great Resignation is upon us, and it does not seem to be slowing down. As I write this blog, I searched Google news for “Great Resignation” Here is what I got: (All less than a week old based on Google)

  • “The great resignation is changing work in America, and it’s here to stay” – CNET
  • “The Great Resignation is your Best Chance to Land Your Dream Job: Here’s How” – Forbes
  • “Latinas are Leading the Great Resignation-Here’s Why” – Yahoo
  • “’Great Resignation’ hits schools across all positions” – NBC

You get the idea. It is here, it is affecting everyone, and it does not appear to be changing anytime soon.

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With all that said, you may have quit your old job for what you thought was your dream job, received a large signing bonus and then found out that it wasn’t your dream job after all or your dreams have changed. Whatever the reason, you left that so called dream job and had to pay back that large signing bonus…and then some! Right? Or at least that is what it feels like.

When you get a signing bonus, taxes are withheld (Income, FICA, Medicare) and then when you pay it back (If it isn’t withheld out of your paycheck) you pay back either the full gross amount or the gross amount less FICA and Medicare, depending on whether it is the same year or a subsequent year. Either way, it starts to get confusing, which makes it feel as if you’re out the taxes they withheld, whether it be the income taxes withheld or the FICA/Medicare taxes withheld. The following is what should happen.

Signing bonus repaid in the same year – If your signing bonus was repaid in the same year then you only need to repay back the gross amount less the FICA and Medicare withholdings. The previous employer would have to file a 941-X to claim a refund of the FICA and Medicare taxes. The federal and state income tax withholdings would be reported on your W-2 and either used up on your tax return or refunded based on your tax liability as normal. Everyone is made whole, at least when it comes to money.

Signing bonus repaid in subsequent year – If your signing bonus was repaid in a subsequent year AND the repayment was over $3,000 than you have two methods to choose from based on what is called Claim of Right. Method 1 will allow you to deduct the repayment on Schedule A (Form 1040), line 16, other itemized deductions. Method 2 will allow you to claim a tax credit for the repaid amount based on a calculation of what your tax savings would have been in the year you reported the signing bonus as income. Pick the method that gives you the best outcome. IRS Publication 525 (2020), has a simple example to walk through for a visual.

Unfortunately, if the repayment is under $3,000 then the Claim of Right does not apply, and you will not be able to recoup the income taxes paid on it. Amending is not allowed, based on the facts that the money was received, and you had a right to the money in the year reported.

What about the FICA and Medicare taxes withheld? You may try and recoup any excess FICA or Medicare taxes from your previous employer. (Assuming you can get them to amend a prior payroll report and get a refund, which is highly unlikely that they would do this for you.) Your other options are to get a statement from them indicating the amount of the excess collected and then file Form 843 or leave it as a credit paid and applied to your future Social Security benefits, which depending on the amount, may be the best option after weighing in costs for filing, time and headaches. Any “Additional Medicare Tax” can only be recouped on an amended tax return and would have to be addressed via the 1040-X instructions or through your Henry+Horne tax advisor.

If you received a signing bonus and had to repay it back either in 2021 or will be repaying it back in 2022 please let your Henry+Horne tax advisor know, and we can run the best outcome for you, along with help provide peace of mind by checking the numbers so that you aren’t out any additional money that you don’t need to be.

If you have any questions, contact your Henry+Horne tax advisor.

Chris Morrison, CPA