Payback Agreements – How to Collect and

Tax Concerns

What Expenses to Include?

• Taxables, excludables, and business expenses.

• Third-party homesale expenses?• Executive paybacks and Sarbanes-

Oxley? Paybacks do not create a “loan”.

• Payback applied proportionately among expenses.

Example: Expense Breakdown

• $10,000 excludables

• $1,000 box 12-p excludables

• $15,000 taxables

• $14,000 third party homesale costs

• $40,000 total expenses

• $20,000 payback (50% of total expenses)

Example: Expense Breakdown

• $5,000 excludables (50% of $10,000)

• $500 box 12-p excludables (50% of $1,000)

• $7,500 taxables (50% x $15,000)

• $7,000 third party homesale costs (50% x $14,000)

• $20,000 payback (50% of total expenses)

Previous Year Paybacks

• W-2c for year of original reimbursement.

• Do not touch boxes 1-2 on W-2c.• Only adjust boxes 3-6 on W-2c.• Company should refund SS & Med

overpayments and obtain signed affidavit from employee.

• Report adjustment on 941-X or 944-X to recover SS and Med taxes.

Example: Payback of Previous-Year Expenses

$7,500 taxables (50% x $15,000)

W-2c:

• Total Medicare Wages (Boxes 3 & 5)

-$8,121.28 ($7,500 + SS/Med W/H)

• Soc. Sec. Withholding (Box 4)

-$503.52 ($8,121.28 x 6.2%)

• Medicare Withholding (Box 6)

-$117.76 ($8,121.28 x 1.45%)-

Previous Year Paybacks

• Employee should not file an amended tax return.

• On current year’s return, an itemized deduction on the Schedule A to retrieve Federal withholding, subject to 2% floor.

• Best not to give guidance to employees – “consult tax advisor”.

Current Year Paybacks

• Apply adjustments to all earning and withholding boxes for the current year.

• “Wage-offset method” should be followed, not “claim-of-right method”.

Sources

• IRS Publication 525 (page 33 of 2012 edition) and Publication 17 (pages 83 & 200 of 2012 edition).

• IRS Publication 15 – Circular E (page 34 of 2013 edition).

• Revenue Rulings 67-48 and 79-311.

• Private Letter Rulings 9050053 and 9313015.

Thank You!For more on Tax, Relocation, Legal and Payroll visit our blog at:

Blog.orionmobility.com

Follow us on Twitter@Orion_Mobility

For more visit our website:

www.orionmobility.com