Repayment of Wages

[Snaggletooth]

GM twisted a lot of arms to get a bunch of people to take retirement. There are two plants close by, so I have a number of GM clients.

One of these was paid disability in 2004, and received a W-2 for $15,000 roughly. Now they tell him he was paid $700 too much so they've taken the money back by withholding the $700 from his retirement in 2006. GM has sent him a "W-2c" for 2004, for $14,300. This alone would lead you to believe that taxpayer could file an amended 1040X for 2004, showing less income. No income tax was withheld from the disability, so he would get a refund of some $200 +.

But the $15,000 was actually received in 2004, and the repayment made in 2006. GM sends a letter stating that the $700 can be deducted in 2006 only, and only as an itemized deduction. Taxpayer has paid off his house years ago, and hasn't itemized in years.

Why is this only an itemized deduction? If Unemployment has to be paid back, this is a direct reduction of income. Why is wages any different?

First Question: Is GM correct?
2nd Question: If so, why?

Regards and thanks for your ear - Ron Jordan

[S T]

Repayments

I can understand your concern, and it does not seem fair at all. I have had this happen on unemployment benefits. Benefits received in one year and repayment in a subsequent year. Fortunately, it seems that SSA repayments are usually handled on the SSA form, and the SSA benefit on the 1099 form reflects same. Unemployment benefits received with repayment in the same year are reported on line 19, see TB 3-3,

We would like to hope that the Benefit Administrator might reflect the repayment on the W2/1099R form for 2006 and net the t/p 2006 benefit less the repayment, but that is not what you are indicating.

TB page 3-19 provides the procedure for repayments. So if under $3,000 and t/p does not file a Schedule A, it appears that there is no recovery process on the tax return. Also in Pub 525.

What I found under the W-2C instructions (page 2) for repayments is " If an employee repays you for wages received in error in a prior year, file Form W-2c to correct only social security and Medicare wages and tax. Do not correct wages reported in box 1 for the amount paid in error. TIP: Please tell your employee that the wages paid in error in a prior year remain taxable to him or her for that year. This is because the employee received and had use of those funds during that year. The employee is not entitled to file an amended return to recover the income tax on these wages. Instead the employee is entitled to a deduction (or credit in some cases) for the repaid wages on his or her Form 1040 for the year of repayment"

So it would seem that GM (could) be correct if Box 3 and 5 are completed on the W-2C correction reporting, but if Box 1 is corrected on W-2C that would not appear to be correct.
Box 1 can not be corrected if the repayment is for a prior tax year.

Disability reported on W-2 is disability provided 100% by employer or 3rd party and fully taxable the same as wages unless there is a code J in box 12 which would be non taxable to the t/p.

Sandy

[BP.]

Sandy, I need help

Sandy, I think I need help in correctly interpreting your answer to Ron. As you posted, repayments of prior year earnings should only be corrected in W-2c boxes 3 & 5, but not box 1. The client must have had a box 1 correction, or Ron's question wouldn't have come up. (Not to mention that there are circumstances where disability pay is not subject to SS & Medicare taxes, so that boxes 3 & 5 would be blank anyway.) Then at the end of your post you say it seems the W-2c "could be correct." I'm hoping you can clarify, as I have various repayment issues crop up now and then. Thank-you!!

[S T]

Info difficult to find

I was thinking that the W-2C "could" be correct depending on the box that the entry was made in. If in Box 1, doesn't appear to be correct, because the instructions state only to make the correction in box 3 & 5 for fica/mcare wages due to repayment for prior year. I made an entry in the prior post to clarify.

I guess we need to know from Snags, which boxes are completed on the W-2C.

If an overpayment occurs in the the same tax year, then box 1 can be corrected on form w-2C and box 3 & 5 for fica/mcare wages.

If an overpayment occurs and is discovered in a later tax year, the W-2C form is used only to correct box 3 & 5 for fica/mcare wages. Not for Box 1.

I haven't found how exactly the payor is to report to the payee the amount of the overpayment, other than by a letter notification, so the t/p would know how to report on their tax return.

Sandy

[Unregistered]

I

If an overpayment occurs in the the same tax year, then box 1 can be corrected on form w-2C and box 3 & 5 for fica/mcare wages.

No, if it occurs in the same year then it should be reflected on the original W-2.

[Bees Knees]

No, if it occurs in the same year then it should be reflected on the original W-2.

What do you suggest? Inventing a time machine?

I think what Sandy menat was that if the original W-2 is wrong, you can do the W-2c thing...

[Snaggletooth]

Amazing W-2c

Taxpayer actually had $900 withheld on this disability W-2 in 2004.

But W-2c shows the $700 difference in Social Security Wages and Medicare Wages ONLY. The difference that would have occurred in Social Security and Medicare withheld is also shown.

However "Wages, Tips, etc" is blank. Also withheld income tax is blank. Essentially, all boxes in the "Previously Report" and "Correct Information" are BLANK with the exception of Boxes 3,4,5, and 6.

Bizarre. I've read everyone's responses, and still hard to follow the thought process of how the correction should be done and resulting tax savings, if any.

[S T]

Yes Confusing

Yes Snags, as I was trying to find the answer for you, I found it very confusing. : So to add to your confusion, the following:

I can find no reporting procedure for the repayment for the taxpayer, but it is obvious that the t/p can not amend the 2004 return. Does not appear that an actual government form is issued. T/p will have to try to claim repayment on 2006 return.

If you follow what the reporting procedure is, the employer/payor corrects the prior years W-2 on form W-2C, (not box 1) only box 3 or 5, fica/mcare wages and box 4 and 6 fica/mcare tax withheld, the employer/payor then files a form 941C requesting the refund of the overcollected amount of the fica/mcare and attaches that to a CURRENT form 941 and takes the adjustment in the Current Quarter. Other option is to file a form 843, claim for refund. The employer/payor could have filed for only the employer portion and then the employee would have to file for his portion of the refund. OR GM could have filed for both the employer/employee (combined) refund.

Now the question is whether or not the payor refunded the over collect amount of the FICA/Mcare to your t/p??? If he has not received his portion, he could contact GM, or a 941C needs to be completed and a form 843 for the claim for refund. There is a certification section on the 941C that states whether the overcollected amount has been repaid to the employee or the employer has obtained a statement (if for prior year) that the employee will not file a claim for refund, etc --------------- (4 different certifications)

http://www.irs.gov/pub/irs-pdf/f941c.pdf#search=%22form%20941C%22

http://www.irs.gov/pub/irs-pdf/i843.pdf#search=%22form%20843%22

http://www.irs.gov/pub/irs-pdf/f843.pdf#search=%22form%20843%22

So why did t/p have $900 withheld from his checks when adjustment is only for $700?

Since you stated earlier that t/p does not usually file Sched A, I don't believe he will receive any tax relief for the repayment, but maybe he might receive the difference on the fica/mcare from GM or IRS. Hopefully the t/p kept his payment advices/stubs so maybe you can review.

A lot of work for little refund!

Good Luck,

Sandy

[Unregistered]

What do you suggest? Inventing a time machine?

I think what Sandy menat was that if the original W-2 is wrong, you can do the W-2c thing...

A time machine is not necessary unless the W-2 was prepared prior to year end.

[Snaggletoof]

Good Grief

Haven't you ever seen a W-2 that was simply WRONG and had to be re-issued effective in the same year? Good Grief...