Tax implications of paying back a signing bonus
November 7, 2014 10:49 AM Subscribe
If I have to pay back a signing bonus because I didn't stay at the job for a full year, is there any way to recover the taxes I paid on the signing bonus?
I've accepted a new job, and part of my compensation package is a signing bonus. However, if I don't stay at the job for a full year, I need to pay back the signing bonus. Let's assume they withhold the taxes on the signing bonus, the same way they do for normal pay. Now let's say I leave the job before I've worked there for a full year, and I have to pay back the signing bonus. Is there a way for me to recover the taxes I paid on the signing bonus?
A few different scenarios :
1) They withhold the taxes on the signing bonus. They pay me the signing bonus before the end of 2014. I leave the job in the middle of 2015.
2) They pay me the signing bonus in early 2015. They withhold the taxes on the signing bonus. I leave the job in the middle of 2015.
3) They pay me the signing bonus in early 2015. I ask them not to withhold the taxes on the signing bonus; I tell them that I will pay taxes on it myself at the end of the year. I leave the job in the middle of 2015.
By default, they expect to give me the signing bonus before the end of the 2014, but I may be able to get them to hold off until early 2015. I realize it would be best if I could ask them not to withhold the taxes on the signing bonus, but that may be difficult/awkward. I'm guessing the worst case scenario is they insist on paying me the bonus before the end of 2014.
Obviously, I don't plan on leaving the job (otherwise I wouldn't have accepted it), but in the event that the job doesn't work out, I don't want to be stuck paying taxes on money that I have to give back.
I've accepted a new job, and part of my compensation package is a signing bonus. However, if I don't stay at the job for a full year, I need to pay back the signing bonus. Let's assume they withhold the taxes on the signing bonus, the same way they do for normal pay. Now let's say I leave the job before I've worked there for a full year, and I have to pay back the signing bonus. Is there a way for me to recover the taxes I paid on the signing bonus?
A few different scenarios :
1) They withhold the taxes on the signing bonus. They pay me the signing bonus before the end of 2014. I leave the job in the middle of 2015.
2) They pay me the signing bonus in early 2015. They withhold the taxes on the signing bonus. I leave the job in the middle of 2015.
3) They pay me the signing bonus in early 2015. I ask them not to withhold the taxes on the signing bonus; I tell them that I will pay taxes on it myself at the end of the year. I leave the job in the middle of 2015.
By default, they expect to give me the signing bonus before the end of the 2014, but I may be able to get them to hold off until early 2015. I realize it would be best if I could ask them not to withhold the taxes on the signing bonus, but that may be difficult/awkward. I'm guessing the worst case scenario is they insist on paying me the bonus before the end of 2014.
Obviously, I don't plan on leaving the job (otherwise I wouldn't have accepted it), but in the event that the job doesn't work out, I don't want to be stuck paying taxes on money that I have to give back.
On your 2015 return, I believe you can deduct the repaid amount that you previously reported as income on your 2014 return. I think the mechanics of it depend a bit on the amount of the bonus. I'd research the IRS guidelines.
posted by AndrewInDC at 11:01 AM on November 7, 2014
posted by AndrewInDC at 11:01 AM on November 7, 2014
Here is the relevant portion of Publication 525 if the payment and repayment occur in different tax years. The section also deals with the refund of payroll taxes (you have to ask your employer for a refund).
posted by melissasaurus at 11:01 AM on November 7, 2014
posted by melissasaurus at 11:01 AM on November 7, 2014
Some quick googling leads to IRS Pub 525. There's a section on repayments. Seems you can itemize the repayment.
posted by hwyengr at 11:01 AM on November 7, 2014
posted by hwyengr at 11:01 AM on November 7, 2014
And, to answer your scenarios:
1) not ideal -- you'd have to claim it as a deduction on Sch. A (meaning you have to itemize) and miscellaneous itemized deductions are subject to a 2% of AGI floor
2) they can't not withhold taxes on it; you could potentially up your W4 allowances just before the bonus is paid, but if it's treated as supplemental wages in their system (which it likely is) it will be withheld at a flat rate
3) this is the best case scenario, and I would ask them not to pay it until 2015. If you need to repay the bonus in 2015, your W-2 should accurately reflect the amount. You may still need to request a refund of overpaid payroll taxes.
posted by melissasaurus at 11:07 AM on November 7, 2014
1) not ideal -- you'd have to claim it as a deduction on Sch. A (meaning you have to itemize) and miscellaneous itemized deductions are subject to a 2% of AGI floor
2) they can't not withhold taxes on it; you could potentially up your W4 allowances just before the bonus is paid, but if it's treated as supplemental wages in their system (which it likely is) it will be withheld at a flat rate
3) this is the best case scenario, and I would ask them not to pay it until 2015. If you need to repay the bonus in 2015, your W-2 should accurately reflect the amount. You may still need to request a refund of overpaid payroll taxes.
posted by melissasaurus at 11:07 AM on November 7, 2014
Response by poster: melissasaurus : Thanks for the response. Quick question -- are you mixing up #2 and #3? #3 is where I ask them not to withhold.
posted by evil otto at 12:12 PM on November 7, 2014
posted by evil otto at 12:12 PM on November 7, 2014
Sure. You'll get it back as part of your tax refund when you file your return, since it will no longer be reported as income.
In scenario 1, I think you'd have to file a corrected 2014 return when you leave the job and pay back the signing bonus. You'd get a refund soon after you file the correction. Consult an accountant or tax professional about this, because I'm not sure (you may have to claim it as a deduction on your 2015 taxes rather than filing a correction to your 2014 return, and then you wouldn't see the money until 2016 -- I am not sure).
In scenario 2, you'd get the refund when you file your 2015 return in early 2016.
In scenario 3, you'd return the full amount of the bonus, and it would not be reported as income, so you'd never have paid taxes on it in the first place.
posted by tckma at 12:50 PM on November 7, 2014
In scenario 1, I think you'd have to file a corrected 2014 return when you leave the job and pay back the signing bonus. You'd get a refund soon after you file the correction. Consult an accountant or tax professional about this, because I'm not sure (you may have to claim it as a deduction on your 2015 taxes rather than filing a correction to your 2014 return, and then you wouldn't see the money until 2016 -- I am not sure).
In scenario 2, you'd get the refund when you file your 2015 return in early 2016.
In scenario 3, you'd return the full amount of the bonus, and it would not be reported as income, so you'd never have paid taxes on it in the first place.
posted by tckma at 12:50 PM on November 7, 2014
Yes - I did mix up 2 and 3.
posted by melissasaurus at 6:05 AM on November 8, 2014
posted by melissasaurus at 6:05 AM on November 8, 2014
This thread is closed to new comments.
posted by Nimmie Amee at 10:58 AM on November 7, 2014 [3 favorites]