On 3/30/2023 4:55 PM, Stuart O. Bronstein wrote:
adding back the OP from Mr. Bronstein:
An employer paid a new employee a signing bonus in 2022 (withholding
all necessary taxes). The employee didn't last to fulfill his
commitment, so paid back the bonus in 2023. The employer just wants to
net everything and not include the $10,000 on the employee's W-2 for
2022. I advised against it, and they asked what the penalty would be
if they did what they propose.
As far as I'm aware, since there would apparently be no taxes due (in
theory - I'm still not so certain) would there be a penalty for that?
Thanks for any thoughts.
--
Stu
http://DownToEarthLawyer.com
Taxed and Spent <nospamplease@nonospam.com> wrote:
honda....@gmail.com wrote:
IRC Section 1341 appears to be the correct tool for dealing with
this, as described at the following August 2022 site and many
other sites:
https://www.investopedia.com/terms/s/section-1341-credit.asp
I guess the employer and employee are going to do what they're
going to do here. I would suppose any penalty would be related to
tax fraud. Then again and as you point out, the bottom line of
these two approaches may be exactly the same.
Given the effort required for the IRS to pursue this "fraud" (if
the IRS can even detect it through non-extraordinary means), I
have doubts the IRS would notice.
I guess the biggest flag might appear if the employer's books
were reviewed.
But why not do it the right way and sleep better at night?
Section 1341 requires "an item was included in gross income for a
prior taxable year (or years) because it appeared that the
taxpayer had an unrestricted right to such item"
In this case, it seems the item did not have an unrestricted right
to such item.
Seems the payment in 2022 was a loan, to be forgiven if the terms
were met.
Having to pay money back, by itself, doesn't mean the person doesn't
have an unrestricted right to it. If the contract were drafted so
that the money was a loan, to be forgiven if the employee completed
his obligations, then I'd agree with you. But in this case the
employee earned the money and he had every right to keep it, as long
as he performed his obligations under the contract.
So, he DIDN'T earn the money and have every right to keep it.
If the mere possibility of having to pay money back meant it wasn't
taxable, most of the money companies earn from the sale of goods
wouldn't be taxable for several years after the sale, because the
customer could sue to get their money back, and could even win those
suits, for that period of time.
Getting a bit far afield, I'd say.
Unable to sleep, I found a number of web sites with varying idea on how
to handle this.
One reg suggests the bonus is not a valid deduction until its
contingencies are met, although the fact that the money was paid seems
to counter this thought. I think this is not the favored approach, and
there may be other regs, etc. that clarify this, as it is part of
employee compensation.
Others say use the section 1341 approach, brought to our attention by honda.lioness, of whom I am a fan.
This site throws a bit of a wrinkle in the section 1341 analysis: "You
must have a reasonable expectation that you had an unrestricted right to
the money at the time you received it. If you knew you were going to
quit within the bonus vesting period, then you do not qualify for the
credit. If you had no idea that you would be leaving within the vesting
period then you can claim the credit- just make sure you document this
case." But: "knew" - when? Being unable to claim the credit in this
manner seems to favor the W2C approach suggested by others, below.
https://www.cerebraltaxadvisors.com/blog/signing-bonuses-and-their-tax-implications/
Here is an article that says employee can, depending on specific facts,
claim in either year 1 or year 2:
https://gct.law/Att/2375
One approach which I seem to like says that if the employee received
wages in year 2, net the repayment against year 2 wages:
https://tax.thomsonreuters.com/blog/overpayments-and-repayments/
Other sites say issue a W2C for year 1, and have employer and employee
amend their year 1 filings.
https://dimovtax.com/how-to-get-tax-paid-back-for-bonus-repayment/
Another site says this is not the way to do it, use section 1341.
Here is a Law Review Article with more history and footnotes than you
can bill your client for:
https://scholarship.law.wm.edu/wmblr/vol1/iss2/3/
If it was me, I would do what the client wishes in this case, assuming
the amount of the bonus is fairly ordinary and not huge. I doubt anyone
would notice, and the net effect, all around, is not unreasonable. Of
course, appropriate cautions should be given to cover your behind.
--
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