How do I get back the taxes taken out from a bonus?

Question

i received a bonus check from a company 1. however, i got a better job offer from another company 2. now I need to pay back the bonus to company 1. how do I get back the taxes taken out from the bonus from the IRS? Is it easy? What do I actually need from IRS and Company 1?

Answer 1

Assuming taxes were withheld from the bonus, as you wouldn't ask the question otherwise....

If you pay back company 1 the same year you receive the bonus check, the company might be able to void the transaction for tax purposes; in other words, you pay them back the net amount of the check, and they "correct" the report to the IRS to note that you didn't receive anything.  I don't think you have a right to demand that, however.

Otherwise, if you pay them back the same year, you're out the withheld taxes, but you should get it back when you file your tax return, as there's no taxable income associated with the transaction.  (You may lose the employee share of FICA taxes, but it's not clear.)

If you pay back the bonus in a following year, the amount you pay back is deductible under the "claim of right" clause.  You have the option of deducting it as an itemized deduction in the year of repayment, or of recalculating the tax in the year of receipt as if you hadn't received it, and take the difference as a credit for taxes in the year of repayment.

In either case, you can probably adjust your withholding from company 2 to avoid paying much additional money.  Remember to change it back the year after repayment, or you may have estimated tax penalties.