Any overpayment would be refunded after filing. If the employee earned less than $7,000 after the removal of the bonus, then they could reduce the wages and file their 940 at the end of the year appropriately. If the employee stayed long enough to earn over the $7,000 FUTA wage base (without the bonus), then there would be no need for a refund.
It’s worth noting that a sign-on bonus would have been one of the first payments received by an employee-meaning that it’s likely that Federal Employment taxes (FUTA) was calculated on that amount. If the employee left in the same quarter (so in this case, May or June), then a 941X would not be needed, just a proper filing of the reduced wages.
At this point, the employer would be whole-they’ve received the net back from the employee and the taxes back from the IRS. The employer will then receive a refund from the IRS for the $806 overpaid in taxes. The company can now file a 941-X (Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund) for the 2nd quarter (or the quarter the bonus was paid in), reducing wages by $2000, federal taxes by $500, and Social Security and Medicare by $153 for the employer and $153 for the employee (it’s a shared tax). When all’s said and done, the employee cuts a check to the company for $1,347. And we’ll use the supplemental rate for federal (25%), so deduct another $500. Social Security and Medicare taxes (FICA) taken would be $153. For this example, let’s assume this is a state with no tax and only federal taxes were taken. The first item to consider is gross payment versus net received. Fast forward to October, and the individual has left the company. Their $2,000 sign-on bonus is paid, under the agreement that the individual will stay for at least a year. The process of getting these funds back is often called “clawback.” Below are a few common scenarios a company might encounter when trying to claw back a sign-on bonus. So, what happens when an employee leaves the company prematurely? Quite simply, the employee must pay back the bonus. But all good things must come to an end-some sooner than others. Most are contingent upon the new employee working for the company for a minimum amount of time, typically a year.įor employees, it’s a warm and fuzzy feeling being welcomed with open arms (and pocketbooks). These are typically one-time payments offered to potential hires, used to incentivize them to join your company. With unemployment reaching historic lows, companies are increasingly using “sign-on” bonuses to win over prospective talent.
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