Sign on bonuses question

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Post Reply
Topic Author
stocknoob4111
Posts: 3495
Joined: Sun Jan 07, 2018 11:52 am

Sign on bonuses question

Post by stocknoob4111 »

Most sign on bonuses have repayment clauses in case of separation from the company within a certain time, typically a year. Question - say the sign on bonus has a separation timeline clause of 1 year and the end period falls into next year. The sign on is included in the gross of this year's income.

In case of repayment how is it deducted from gross wages? What if taxes have already been filed? Do you get an amended W2 and have to file an amended tax return? Or is is deducted from the current year taxes? If it's the latter it would be painful as the tax brackets may be much different.

Example - sign on received in May 2022, employee is laid off in April 2023. Taxes for 2022 tax year was already filed with IRS taking into account sign on. Now, sign on has to be refunded to the company in 2023.

Case 1 - Amend 2022 returns to reflect reversal of bonus
Case 2 - the reversal is available in 2023 returns, however assume I have very little income in 2023. I have paid taxes on the bonus in the 32% bracket for 2022, now I am not going to get those taxes back in 2023 as I have nothing to deduct against or my bracket is very low so I lose a huge chunk of the difference. Going to be a VERY painful experience.

Even worse, I hope you don't have to repay the sign on net and lose the taxes? That wouldn't make much sense since that received amount was reversed and never really received in the first place.

From what I am reading I do a "claim of right" filing in 2023 to refund the Federal taxes, any SS and Medicare taxes paid which I will get a check for from the IRS, then I have to write a check for the full gross amount to the employer... do I understand this correctly?

Anyone can shed some light on this?

On another note - is it reasonable to negotiate the sign on contract such that if I get laid off I keep the sign on, if I voluntarily leave OR if I am fired for due cause within the time period then the bonus is repayable.
RubyTuesday
Posts: 2236
Joined: Fri Oct 19, 2012 11:24 am

Re: Sign on bonuses question

Post by RubyTuesday »

Sorry, not an answer to your question, but hopefully useful.

Your example had the separation described as laid off. I would negotiate any hiring bonus claw back clause to exclude involuntary separation that was not for cause (and try to exclude involuntary separation for any reason).
“Doing nothing is better than being busy doing nothing.” – Lao Tzu
soxfan10
Posts: 330
Joined: Wed Jan 21, 2015 9:38 pm

Re: Sign on bonuses question

Post by soxfan10 »

It seems very unlikely that an employer would go after a bonus if they lay someone off - they just want the person to go away quietly and not sue them. Possibly if they were firing for cause.

Its generally used for people to not voluntarily leave during the period. In any event, yes the full amount is included in 2022. You may have a claim of right deduction in 2023 if the amount the employer recovers is more than $3k. Then generally claim of right would put the taxpayer back in a similar place.
Topic Author
stocknoob4111
Posts: 3495
Joined: Sun Jan 07, 2018 11:52 am

Re: Sign on bonuses question

Post by stocknoob4111 »

thanks for the feedback
RubyTuesday wrote: Tue Apr 05, 2022 6:47 am Your example had the separation described as laid off. I would negotiate any hiring bonus claw back clause to exclude involuntary separation that was not for cause (and try to exclude involuntary separation for any reason).
Yes, this is what I am thinking, to explicitly include verbiage that specifies exclusion of involuntary separation OR explicitly specifies separation for cause or voluntary thereby implicitly excluding involuntary.

Yeah, may come across sounding like the candidate does not "trust" the employer but this is just business as far as I am concerned. I was laid off once by a company 6 weeks after joining (caught in a company wide reduction) which cost me several thousand dollars in financial damage since I left my previous contract a couple months before the end date.... so once bitten twice shy.
Fpdesignco
Posts: 302
Joined: Fri Jan 14, 2022 9:30 pm

Re: Sign on bonuses question

Post by Fpdesignco »

Typically whenever you get a sign on bonus there are clauses tied to involuntary separation for business reasons that you do not have to repay them (its pretty standard, but sometimes you have to ask).

The actual wording of how the agreement is written, and your state law matter very much. For instance, if you have to "pay back" your bonus, if you terminate or get terminated within a year, is the timeframe spelled out (i.e. you need to payback within x timeframe?) If its not there, you can ask, or you can leave it open..... This is a common oversite in how these are written. It's actually if you think about it not very reasonable to expect a day (1) payback especially if the bonus amounts to a significant amount of the employee's yearly salary / earnings and even if they put that in, its pretty much unenforceable in reality.

Just as a note, as someone who has had to recoup bonuses depending on the amount a lot of times the employer will be open to negotiating as the reality is recouping bonuses is near impossible to start with and expensive, and especially if this was a layoff / job position elimination typically leaves some room for discussion. The reality is also, if its less than 10-20k, very unlikely the employer will pursue it legally and if its a mega-corp little at all unless they have a standing policy around it / precedent (its viewed as a sunk cost, and whatever can be recovered is better than nothing). Just like if you have ever dealt with commercial or residential real-estate, "collecting" is the big problem, a judgement only means so much.

For the record, not suggesting unethical / immoral behavior, just stating a observation. Also, not legal advice, just wanted to give perspective from the other side of the table as well. You should always do whatever you sign in a contract however there are always realities to consider in a worst case scenario (i.e. resigning due to family illness, or personal illness, etc.. in the first year, and being financially strapped due to that).

https://www.dickinsonlaw.com/blogs-arti ... mpensation
"Repayment in subsequent year. If the employee repays the compensation in a subsequent year, the employee must repay the net payment plus the income tax withheld. The employer will recoup the FICA tax withheld by amending its 941 returns. The employer must also issue a corrected W-2 showing the employee’s corrected Social Security and Medicare compensation, and corrected Social Security and Medicare withholdings (boxes 3, 4, 5 & 6). Rev. Rul. 79-311. However, the W-2 compensation reported in box 1, and the withholding in box 2, stays the same. The reason is that the employee has received the benefit of the income tax withholdings when the employee filed his or her income tax return for the year.

For example, assume the same facts as above except the $310 of withholdings consisted of $76.50 of Social Security and Medicare and $233.50 of income tax. The employee will need to repay $923.50 ($690 + $233.50). The employer will recoup the $76.50 by filing an amended 941 return. Of course, if the employee was over the Social Security wage limit, there would be no Social Security withholding to recoup. The employee will be entitled to deduct the repayment in the year paid as a miscellaneous itemized deduction. CCA 2005-0146. However, if the repayment was less than $3,000, the employee may have other options on deduction. See IRS Publication 525. "
Last edited by Fpdesignco on Tue Apr 05, 2022 6:14 pm, edited 1 time in total.
Topic Author
stocknoob4111
Posts: 3495
Joined: Sun Jan 07, 2018 11:52 am

Re: Sign on bonuses question

Post by stocknoob4111 »

thanks for the detailed response, that was very informative
Topic Author
stocknoob4111
Posts: 3495
Joined: Sun Jan 07, 2018 11:52 am

Re: Sign on bonuses question

Post by stocknoob4111 »

Have a question - say I quit the company in November 2022 and I send them the money to repay the bonus in December 2022 and they process it in Jan 2023 on their end. In which tax year is the repayment recorded?

Once I initiate repayment of the bonus in 2022 is the employer obligated to report the repayment to the IRS so those are not considered wages that will show up on my W2? I will also get the payroll taxes back at tax time right?

Also how do I keep proof that the repayment was related to the clawback of wages and not just some gift to the company so that if the company does not take it off my W2 reported wages then what recourse do I have to dispute it with the IRS?

If the amount is not reversed in the same tax year then this causes an issue for me in terms of tax rates. Say I pursue another company and the new company gives me a sign on bonus. My marginal rate now is fully in the 32% bracket and i'll have to pay taxes on ALL of the new bonus in that bracket, however if I return the original bonus then it would straddle the 24% and 32% brackets so my tax liability would be higher.
ScubaHogg
Posts: 3520
Joined: Sun Nov 06, 2011 2:02 pm

Re: Sign on bonuses question

Post by ScubaHogg »

Here’s what I did

Sign on with a company I started with in 2017. Obviously they took taxes out of the bonus check they wrote me.

Bonus required a 2 year commitment with a payback if you left, but if you stayed at least a year the bonus payback was prorated (number of months / 24). I left after 13 months (2018). One year later I paid back what I owed (so now 2019), which was about half the gross amount of the bonus. So now I’ve overpaid my 2017 taxes effectively.

In 2020 I prepared my 2019 taxes and did the “claim of right” thing. I believe there were 2 calculation options, I chose the “credit.” Got my refund from the irs no problem.

Here’s a link to the irs doc I used. Idk if it has been changed in the last couple years.

https://www.irs.gov/pub/irs-pdf/p525.pdf
There are more things in Heaven and Earth, Horatio, than are dreamt of in your Expected Returns
Topic Author
stocknoob4111
Posts: 3495
Joined: Sun Jan 07, 2018 11:52 am

Re: Sign on bonuses question

Post by stocknoob4111 »

thanks. Actually I was addressing the situation where the bonus is paid back in the same year.

I wanted to know if I initiated payment then the employer is obligated to issue a W2 that does not reflect those wages were paid to me so that I can avoid the Section 1341 claim of right.

As I understand it, if the bonus is paid back in the same year as a gross payment to the employer then the employer gives me a W2 with the bonus taken off and I get the excess taxes and the payroll taxes (FICA, Medicare) as a refund.

Alternatively I could pay the net amount and they undo everything - gross wages, Federal taxes and payroll taxes recorded, however I think this becomes a bit complicated as those have probably already been reported to the IRS by now.
Topic Author
stocknoob4111
Posts: 3495
Joined: Sun Jan 07, 2018 11:52 am

Re: Sign on bonuses question

Post by stocknoob4111 »

Another question...

when I got my sign on my 401k was setup and they gave me the employer match based on it... if the sign on is returned I get to keep the match? I don't see hiw the 491k contribution can be reversed or can/will they?
DarkHelmetII
Posts: 1436
Joined: Mon Jul 24, 2017 12:25 pm

Re: Sign on bonuses question

Post by DarkHelmetII »

I am not a lawyer...but regardless of whether there is language explicitly saying you don't have to refund the sign-on in the case of being laid off, my understanding is that a judge / "the court" would have to rule in employer's favor (unless you simply just hand over the $$) which seems unlikely to me.
Fpdesignco
Posts: 302
Joined: Fri Jan 14, 2022 9:30 pm

Re: Sign on bonuses question

Post by Fpdesignco »

stocknoob4111 wrote: Sun May 29, 2022 1:46 am Another question...

when I got my sign on my 401k was setup and they gave me the employer match based on it... if the sign on is returned I get to keep the match? I don't see hiw the 491k contribution can be reversed or can/will they?

Most plans have this outlined in the plans policy as they are under federal law that ERISA. Whoever is holding it for your company can answer that question and almost 100% it’s spelled out on the plan rules.
Post Reply