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?
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
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