Compensation clawback experiences

January 24, 2016 9:51 AM

I'm dealing with the tax ramifications of a bonus clawback, and it's ugly. I'd like get a feeling for just how ugly it's gonna get. Would any MeFites please share their US compensation clawback experience? I understand none of you are my accountant and that none of you are offering specific tax planning advice.
posted by infinitewindow to Work & Money (10 answers total)

Need more information. What ugliness are you talking about?

Are the original payment and clawback in the same year or different years?

Is the clawback amount less than $3,000?

Is the clawback money you are refunding or applied as a reduction to future salary?

Are they clawing back compensation already received or does it apply to compensation you might receive in the future?

Is the clawback due to a government or regulatory action?
posted by JackFlash at 10:32 AM on January 24, 2016

Response by poster: JackFlash, thank you for helping me focus the question a bit.

• The original payment and clawback were in the same tax year.
• The clawback amount was more than $3,000.
• I am no longer with the company in question. The clawback ended up being a refund. However...
• I received a check for the bonus, and the amount clawed back was partially withheld from my last check when I left the company. W2 lists the compensation like it was all paid to me. This seems like it could get ugly.
• Clawback is not due to a government or regulatory action.

The ugliness seems like it could come from the discrepancy between the amount on the W2 and the fact that I never had possession of part of my income in the first place. I don't think the company can claim that they paid me without actually paying me. If something hinky is going on there, I'll burn that bridge when I cross it—I'm more interested right now in doing my taxes.

So with all that in mind, I'm not asking for tax advice—I just want to hear about any experience MeFites may have had with similar situations, so I can know a little bit about what to expect.
posted by infinitewindow at 11:12 AM on January 24, 2016

If the compensation and clawback were in the same year, that is really the simplest case. In this case, since you paid back the bonus in the same year, you simply exclude it from your income as if it never happened.

But you have some discrepancies here. You said that part of the bonus was deducted from your last check. What about the rest?

Your W-2 should reflect the money you actually received. That would be your base salary, plus the bonus, minus whatever you paid back out of your pocket.

So they paid you the bonus and that should be included in your income since you received the money. If the way they clawed back the bonus was reducing your last check, then your income is all the money you received, including the bonus. You never actually gave any money back to them.

If you think there was an error in the W-2 you can use this procedure. But first have a conversation with the HR people at your former company to make sure that you are not misunderstanding something.
posted by JackFlash at 11:35 AM on January 24, 2016 [3 favorites]

Yeah, this sounds like an accounting error (they took the bonus back but didn't fully account for it) that they would probably catch on their own in a few months (or sometimes years) during an internal or external audit. You should be able to resolve this pretty quickly with HR/accounting- just contact them with the facts in a non-combative way and they will probably just fix it and issue you a new W-2.
posted by rockindata at 11:41 AM on January 24, 2016 [1 favorite]

As JackFlash says, if it's in the same year it's pretty straight forward. In a different year it's a little more tricksy, but not too much. If the amount was more than 3k, you basically get a credit (or deduction) for the extra tax paid in the year ya got it. For your googling reference, it's a Section 1341 credit or deduction. Youshould get FICA refunded from the company.

Not sure how that works for state tax. If a large amount and a high tax state, that could be a substantial amount.
posted by jpe at 2:23 PM on January 24, 2016

IANA attorney or CPA, but it sounds like the place to start is they need to issue a corrected W2. If you got paid the bonus and it got clawed back within one year, that should all be reflected in that one document.
posted by randomkeystrike at 2:40 PM on January 24, 2016

It's not clear to me that the W-2 is incorrect. If you received the bonus and cashed the check and then you received a final check with the bonus deducted, then your W-2 would be correct. The W-2 covers the bonus check and the smaller final check. You received and banked all the money in those checks. You didn't repay any money from your own pocket. In that case the W-2 is accurate.
posted by JackFlash at 5:36 PM on January 24, 2016

Response by poster: JackFlash, I did repay some of the bonus from my own pocket, and I never received a final check.
posted by infinitewindow at 10:38 PM on January 24, 2016

Best answer: In that case, the W-2 should include the total amount you were paid in 2015 on all of your checks minus the amount you paid back out of your pocket. Note that they should also refund to you any excess withholding, social security and medicare taxes.

You say that some of the repayment came out of your last check and some came out of your pocket. You are going to have to sit down and figure out all of the correct numbers. Hopefully you kept all of your pay stubs so you can add them up and see if they match the W-2 they gave you.

Here the first example shows what your company should have done to generate the proper W-2. It is the responsibility of the company to do this correctly. Once you get a proper W-2, then your taxes are just as simple as usual using your W-2.

If you think there is something wrong with the W-2 they give you, then you first talk to your employer and if that doesn't work, you talk to the IRS as explained previously.
posted by JackFlash at 11:12 PM on January 24, 2016

Response by poster: Ended up talking to the IRS, who allowed me to deduct the bonus from the W-2 that the old company would not correct. Thank you, JackFlash!
posted by infinitewindow at 2:48 PM on January 4, 2017