Amended Tax Return for Retention Bonus Payback

  1. Employer's Limited Adjustment: Your employer's statement is correct. For prior year overpayments, they can only adjust Medicare and Social Security taxes on the W-2, not federal income tax withholding.

  2. Medicare Tax Adjustment: The $680.86 reduction in Medicare tax (box 6) is correct, as it represents 1.45% of the $50k bonus repayment.

  3. Social Security Tax: No adjustment was made for Social Security tax, likely because you exceeded the 2021 wage base of $142,800.

  4. Federal Income Tax Impact: While not reflected on the W-2, you're entitled to recover the federal income tax paid on the $50k bonus.

  5. Determining Refund Amount:

    • Review your 2021 return to find your marginal tax rate.
    • Multiply $50k by your marginal rate to estimate federal tax overpayment.
    • Add this to the $680.86 Medicare tax adjustment.

  6. Filing Amended Return:

    • Use Form 1040-X to amend your 2021 return.
    • Reduce your 2021 income by $50k.
    • Recalculate your tax liability.
    • Claim a refund for the difference in tax plus the $680.86 Medicare adjustment.

  7. Documentation: Keep copies of original and amended W-2s, proof of bonus repayment, and employer correspondence.

  8. State Tax Considerations: Check if state taxes were affected and file a state amended return if necessary.

  9. Timing: File your amended return within 3 years of the original filing date or 2 years from the date you paid the tax, whichever is later.

These points summarize the essential steps and considerations for addressing your situation effectively.