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Human Resources/Sign on bonus and taxes

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Question
QUESTION: Hi Brian,

My company paid me $10000 sign on bonus with subject to 2 years contract. If I leave the company after 1 year of service, I pay half of the bonus. If I leave the company within 1 year, I pay them everything. The company paid taxes for this bonus.

I am leaving the company within one year and company is asking me to pay $ 10000 + $ 4000 (taxes).

Do I need to pay $ 14000 to the company?

If I pay them $ 14000 to the company, whom do I ask for $4000 during my tax filing year. Do I get $ 4000 from the IRS because I paid the money back to company.  Will my taxable income reduce by $ 14000 for the year?

It is all happening within one taxable year (2012).

Please advise.

ANSWER: Prady,

First a discussion on what you were paid.  You did not say if the 10,000 was gross pay or 10,000 net pay as a sign on bonus.  You may know that the employer and the employee each pay taxes on gross wages earned and where you gigin is important.

An employer who pays $ 1 in wages actually ends up paying about $ 1.15 in total as the extra  $  0.15 is for employer taxes and insurances like unemployment and worjkers' compensation.   So, if the net pay is $10,000 then the gross bonus was likely about $ $ 11,500 GROSS pay which is the $10,000 "net"  pay plus the employer's extra $ 1,150 in taxes and insurances.

Also, if you were paid the $10,00 as a gross pay, you, as the employee,  would be paying about 25% - 35% in employee taxes so the actual money would have been about $ 7,000.

If the company just gave you a fat check for $ 10,000, then I must assume this was the net check after taxes-- and therefore you were given more than  " $10,000"  as it was more like a Gross check of $ 12,000 to net out to $ 10,000


I am not clear if  you were given a "net" check "after taxes" for $ 10,000  or a "Gross"  check bonus of  $10,000 "before taxes" and the amount of the sign on bonus was actually less- maybe $ 7,800.

IT seems to me if you found the pay stub you received with this check, or any record of this, you would know if the pay was net or gross (before or after taxes).     This would help us know how much you need to return.

The simplest answer is for you to return only what you were given on that sign on bonus.

It is also possible this check was not cut through payroll system and you were just given a check like as though they paid a bill.  Of course, this is not the most legal way to do it---  it should have gone through payroll.  

The next step is the company needs to make sure they  REVERSE out this earnings from your pay history (and the company's paid estimated taxes) so your W2 does not show your yearly earnings being higer that what you will walk away with.   Again, this would be on your W2 or a recent pay stub showing the "sign on" bonus is still in there.   If/when you pay it back, depending on how this was paid to you (as a company bill or via payroll)  then you will know more on how to address it.

Please follow up with any details that might help me give you a better answer based on whether this was a gross  bonus or a net bonus.

Brian

---------- FOLLOW-UP ----------

QUESTION: I received NET bonus of $10000 and employer said that they paid $ 4000 taxes. So the gross payment was of $14000 (I was not aware of these details until I resigned).
Now the employer is asking $14000.

I was willing to pay them $10000 back. But I am not sure about $4000, since they never mentioned about $4000 till I resigned.

If I pay them $4000, where does it reflect in my W-2 or my tax sheet? Do I get the $4000 back for IRS?

Answer
Prady,

Thank you for following up with more detail.

OK,  so with this new info you should only pay back the $10,000.

If the employer understands the payroll and tax process, they will simply reverse this transaction as a payroll overpayment.  The taxes  ($ 4,000) they claim to already have paid will be credited to them as an overpayment.   This 4000 tax figure seems high.

This pay reversal is the same situation if an employee was mistakenly overpaid by the company.   Think about it ---  assume you received this large pay bonus of $10,000 and it should have been $ 1,000.    In this case, the employer would just reverse out the $10,000 transaction and re-process one as $ 1,000 to reduce your gross and get a credit for the tax deposits they already paid in the first quarter.   It is not right they are asking you to pay the employer's taxes too.  Maybe they could be trying to recover extra money from you  or maybe the person asking you for the taxes really doesn't understand how it works from the accounting/ payroll/ tax side.   The calculations are straight forward and the process should be as simple as paying you a "negative  check" for $ 10,000.

I would not give them a dime over $ 10,000

Good luck and follow up if any questions.  

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Brian Phillips

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Foreign and US university students -*PLEASE*- DO NOT waste your time asking for my opinions, comments or analysis of your homework questions. Homework questions are not answered and are rejected. I am happy to help answer questions asked by employees and employers regarding United States based state and Federal wage and hour, OT, Fair labor standards, FMLA, COBRA, Recruiting, Interviewing techniques, employee manuals, discipline, terminations/quits, unemployment, HRIS rollout, Employee Leasing or Staffing company cost analysis, day to day scenarios, work situations and more. Essentially a well rounded HR generalist who operates Harvis, Inc., a human resource consulting and service business based in Northeastern Pennsylvania "NEPA". http://www.harvis.org

Experience

At Harvis, Inc., we provide Human Resource products, services and advice to small businesses that may not have the time or resources to hire a full time HR department. For larger companies with HR managers in place, we compliment their expertise to help with time consuming or time sensitive projects like updating policy manuals, screening and interviewing and more. We make workplaces better by becoming that 1/2 person they need to help handle HR responsibilities on a daily, weekly or monthly basis. Formerly responsible for all Human Resource activity for a staffing agency with 2,500 annual employees as well as an employee leasing / PEO business with 1,500 annual employees. Designed and implemented the HR structure to support hundreds of clients in excess of $ 500 million in payroll volume over career in Human Resources.

Organizations
* President 2006- Harvis Inc. HR Services * President 2010-13 Business Association of the Greater Shickshinny Area - Shickshinny PA * President 2013- ShickshinnyForward Not for Profit Community Long Term Revitalization Organization and former member of varios Chambers of Commerce and HR Taskforce, former President of NBC Business Club 2 years

Education/Credentials
Bloomsburg University - 1993 BS Marketing, Bloomsburg Pennsylvania and Luzerne County Community College - 1991 Business Administration, Nanticoke Pennsylvania

Awards and Honors
* Better than average - 20/10 vision * Bestowed with an occasional "Thank You" from clients and their employees.

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