Taxpayer asks:
Hey, is this where I can ask questions for TaxGirl? Hope so, cuz here goes!
A co-worker told me this long, sad story last week. I’ll shorten it here. She has been working part time since August of 2007, and was supposed to be on half salary. Well, it was JUST determined that she had been getting her FULL salary ever since she got back. Neither she nor the company had noticed the mistake. Of course, the company now wants their money back. She doesn’t have a problem with paying them their money back. However, she wants to be sure she pays back the right amount, and be sure her withholding and W-2 and other related stuff are all correct. Should she try to correct her 2007 tax return as well? How can she make sure this adjustment is handled correctly? Thanks TaxGirl! You’re the Best!
Taxgirl says:
Wow, this is my first “ask the taxgirl” question on Facebook! Thanks for writing in!
This is a great question. I have a couple of thoughts here…
The easiest solution, if your friend can swing it and her employer agrees, is to have her employer subtract the gross pay overage from future paychecks. If the gross pay is adjusted via paycheck deductions, FICA (Social Security and Medicare) and other taxes would be adjusted accordingly, which is much easier on the employer and employee than trying to back it out.
As for the 2007 tax return, it would be technically incorrect, but it depends on the tax bracket as to whether it matters. If there is no difference in tax brackets, it won’t really matter, relatively speaking, if the next year (or 2009) reflects lesser compensation.
Here’s an example: Let’s say her compensation for 2007 was supposed to be $20,000 but she was paid $30,000 – same tax bracket for a single person. There’s likely no real difference, then, in keeping the old tax return and then reporting reduced income on a future return (in fact, it could be more advantageous). The form W-2 for 2007 would not need to be adjusted or corrected. This is the cleanest solution.
Writing a check for the overage is more complicated. Verify all gross amounts and withholding amounts with a repayment schedule. The employer should issue a corrected form W-2 for any affected years which reflects the corrected gross amounts and withholding, including FICA, UC and other deductions.
With a corrected form W-2, your friend can amend her 2007 income tax return. Depending on when the check is written, it may also be necessary to do the same thing for 2008.
It’s a tricky situation. Tread carefully. Double check everything.
There are a lot of unknowns here, the biggest being the amount of compensation, which would affect tax rates and possibly Social Security. Ceilings and floors for deductions and credits could be affected. So, hire a tax professional. Think of the cost of hiring a tax pro as an investment. A few dollars up front could save you a handful of dollars down the road. Our firm often jokes, “You can pay us now or you can pay us later.” Later always costs more.
Any other tax pros want to weigh in here?
Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.
From the question, we can’t tell if she is being requested to pay back in December or next year or over a period of time. It doesn’t seem to me that there should be any correcting of w-2 from 2007 since she received the monies in 2007 and thought she was entitled to same.
If the employer started messing with payroll over the payback it would give erroneous answers for workmen’s compensation, unemployment compensation etc. In other words if the future payroll was reduced by the payback amounts and then she was laid off the benefit from unemployment would probably be reduced. If she was injured on the job it would be a nightmare in the computation for workman’s compensation.
I would think the correct answer was when the monies were paid back a claim of right should be filed with the tax return. Not knowing the amount over-paid perhaps should be a credit or perhaps should be a deduction on schedule A, according to the amount re-paid. Or could perhaps be whichever is the most favorable to the taxpayer. The claim of right should allow a recoup of all taxes paid by her.
I have no idea which State we are talking about, but in Indiana a claim of right would also be filed to recoup all State Taxes paid.
Jeff Day EA
Evansville, IN
If the amount of the overpayment exceeds $3,000, I believe it would be possible to get relief by making a Sec 1341 election. The Sec 1341 election permits the taxpayer to recalculate their prior year tax liability without the excess salary payment and reduce the current year tax liability by the decrease in prior year tax. This reduction could be reflected on the 2008 return if repaid in 2008 and not require amending the 2007 return. Depending on how the numbers work in terms of what tax brackets she was in, this might provide a better answer than simply reducing the current year income by the amount of the refund.
I had similar situation and would welcome any comments.
In worked at a company in Michigan that overpaid three month salary net about $12000
One month in 2007 and two months in 2008. Now in 2009 they want gross payback about $15000. They said they will correct 2007 and 2008 w-2. My question is
Should I pay them gross pay back or net only. I may be able to pay it all back in one payment now. should I or not.
I am on salary and supposed to make $32,000/year. My gross payments are once a month at $2,500/month. I received $2,000 upfront for relocation costs and worked 3 months, totalling +$7,500. Then the school illegally terminated my contract, but was able to get a settlement amount of $22,000 which would be paid off in installments starting with a 1st installment by December 30, 2011 of $7,500. Of my salary for 2011, I received $7,500 for the settlement and $9,500 for my pay including the $2,000 up front, totalling.. $7,500+$9,500=$17,000. I received my w-2’s today and it says that I made $22,000 this year? Should I report tax fraud here?