Hi,
My company overpaid me on my bonus. The bonus was taxed at 50% for whatever reason.
My company would like me to pay back the overpayment out of my normally scheduled pay, which is taxed at roughly 30% for my bracket.
Obviously paying from my paycheck instead of the bonus would result in a large loss in net pay for me.
I certainly want to pay the money back, but I want my net earn to be what it would have been if they had done the bonus correctly. I do not want to lose net earn due to the tax difference of the bonus and pay.
What are the laws/options here?
Thanks!
I must ask how you get to 50%, but then I saw you are in the Big Apple. I suspect between Federal, State and City taxes you would be paying 50%, but you have to get a tax attorney/CPA familiar with New York, not to mention if you reside in another state and commute.
I think you are looking at a "claim of right" regarding the income. It says if you got money mistakenly, you don't have to put it in the year of receipt, or you can repay it back like your employer is suggesting. I think it is IRC §1311-1314. It also is called a "correction of error" when repayments of items previously included in income. CCH states in case of error, the same amounts may have to be repaid. Special rules alleviate any inequity caused by timing difference attributable to the repayment of claim of right amounts following their inclusion in income. Be careful, you have to move on this because if one year is closed and the IRS won't let you fix it in the current year, you can get whipsawed....
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When was the overpayment paid, in 2012 or in 2011?
If it was paid in 2012, and the repayments are taking place in 2012, when you file your tax return in 2013, it will all be adjusted and you will pay the correct total tax. But, your employer can do better by adjusting your withholding as they "take back" (presumably pre-tax) the excess pay with each paycheck.
If you were paid the bonus in 2011, your employer should restate your W-2 to show the correct amount of the bonus and reflect the difference in the correct net pay as a loan to you. You can then pay back the loan in 2012.
We have many clients in NYC and would be glad to work with you and/or your company. We are both tax attorneys and CPAs.
Good luck.
Marty
This is merely your withholding and is not your "tax bracket." Bonuses have some bad withholding rates tied to them because the rates of withholding seem to "assume the worst."
Christopher Larson
www.insightlawfirm.com
www.insightlawfirm.wordpress.com
