A forfeitable bonus is taxed as ordinary income in the year you receive it, even though you might later have to give some or all of it back. The IRS applies the “claim of right” doctrine: money you can spend freely is taxable when you get it, regardless of any future repayment obligation.1Internal Revenue Service. Publication 525 – Taxable and Nontaxable Income If you do repay the bonus later, the tax code offers relief, but the mechanics differ sharply depending on when you repay and how much, and none of the options makes you perfectly whole.
Why You Owe Tax on Money You Might Return
A bonus is forfeitable when your right to keep it depends on something that hasn’t happened yet, most often staying at the company for a set period after a signing, retention, or relocation payment. The repayment obligation lives in a clawback clause in your employment agreement, which spells out the triggers: leaving early, termination for cause, or breach of a non-compete or confidentiality provision.
Your employer withholds taxes on the payment the same way it would on any other bonus. Because bonuses are supplemental wages, federal income tax typically comes out at a flat 22%, or 37% on any portion that pushes your supplemental wages for the year above $1 million.2Internal Revenue Service. Publication 15 – Employer’s Tax Guide Social Security and Medicare taxes come out of the gross figure too, and the full pre-tax amount lands on your W-2 as wages for the year.3eCFR. 26 CFR 31.3402(g)-1 – Supplemental Wage Payments
Gross Versus Net: What You Actually Have to Pay Back
Most employment agreements require you to repay the gross bonus, not the smaller net amount that hit your bank account. Receive a $30,000 bonus, take home roughly $21,000 after withholding, and you may still owe back the full $30,000. From the employer’s side, the withheld taxes were sent to the IRS on your behalf, so you received the entire gross figure.
That leaves you out of pocket for the difference between gross and net until you recover the overpaid taxes. How fast that happens depends almost entirely on whether the repayment lands in the same calendar year as the original payment or in a later one.
Repaying in the Same Calendar Year
Same-year repayments are the clean case. Your employer adjusts your year-end W-2 to exclude the repaid amount from wages, and withholding, Social Security, and Medicare taxes are reduced to match. The income was never reported, so you claim no special deduction or credit on your return.
If the repayment happens late in the year and there isn’t enough remaining payroll to absorb the withholding reversal, the employer should refund the excess income tax and FICA withholding to you directly before December 31 so the W-2 comes out correct. If a clawback is inevitable and the timing is up to you, closing it out before year-end avoids the more painful process that follows.
Repaying in a Later Tax Year
Once the calendar has flipped, you’ve already filed a return reporting the bonus and paid tax on it. You can’t amend that return to remove income you had a claim of right to at the time. Instead, Internal Revenue Code Section 1341 provides relief, but only when the repayment is more than $3,000.4Office of the Law Revision Counsel. 26 USC 1341 – Computation of Tax Where Taxpayer Restores Substantial Amount Held Under Claim of Right
Repayments Over $3,000
Section 1341 gives you two ways to compute your tax in the year of repayment. You use whichever produces the lower bill.1Internal Revenue Service. Publication 525 – Taxable and Nontaxable Income
The first method is a deduction. You claim the repaid amount on Schedule A, line 16, as an “other itemized deduction.” It is not a miscellaneous itemized deduction, so it survives the current-law elimination of that category. The catch is that you must itemize for the deduction to do anything, and if your standard deduction is larger than your total itemized deductions even after adding the repayment, this method produces no benefit.
The second method is a credit. You refigure your tax for the original year as if the bonus had never been included in your income. The reduction in that year’s tax becomes a credit against your current-year tax. If the credit is larger than your current-year liability, the excess is refunded as a tax overpayment.
A worked example: you received a $40,000 bonus in 2024 and repaid it in 2026. First, compute your 2026 tax without any deduction for the repayment. Then recompute your 2024 tax with the $40,000 removed from income. The drop in 2024 tax is your credit against 2026 tax.1Internal Revenue Service. Publication 525 – Taxable and Nontaxable Income
The credit method usually wins, especially if you were in a higher bracket the year you received the bonus than the year you paid it back. Run both calculations before you file.
Repayments of $3,000 or Less
Section 1341 does not apply below the $3,000 threshold.4Office of the Law Revision Counsel. 26 USC 1341 – Computation of Tax Where Taxpayer Restores Substantial Amount Held Under Claim of Right Before 2018, a smaller repayment could be claimed as a miscellaneous itemized deduction, but the Tax Cuts and Jobs Act eliminated that category, and the One Big Beautiful Bill Act of 2025 made the elimination permanent.1Internal Revenue Service. Publication 525 – Taxable and Nontaxable Income Repay $3,000 or less of a bonus in a later year and you get no federal income tax benefit at all. You paid tax on money you gave back, and the code offers nothing.
The $3,000 threshold looks at the total amount repaid on that year’s return, not each payment separately. Two $2,000 repayments in the same year combine to $4,000 and qualify for Section 1341 relief.
Getting Your Social Security and Medicare Taxes Back
Section 1341 covers income tax only. It does nothing about the Social Security and Medicare taxes withheld from the original bonus, and recovering those runs on a separate track.
The normal route is through your employer. After a clawback, the employer files Form 941-X to recover the FICA taxes it overpaid on the bonus, then refunds your employee share to you.5Internal Revenue Service. Instructions for Form 843 That path depends on the employer cooperating.
If your employer refuses, you can file Form 843 with the IRS to claim the refund yourself. The form’s instructions specifically allow employees to recover Social Security and Medicare tax withheld in error when the employer will not make the adjustment.5Internal Revenue Service. Instructions for Form 843 Hold on to written confirmation from the employer, canceled checks, and bank statements; the IRS wants to see the repayment documented.
What Happens to 401(k) Contributions From the Bonus
If your employer withheld 401(k) contributions from the original bonus, the clawback creates a tangle. IRS regulations don’t directly address how to reverse retirement deferrals tied to compensation later returned, and once money is in the plan, there is no established mechanism to pull it back out just because the underlying wages were forfeited.
Employer matching contributions are somewhat easier to unwind. In a same-year repayment, adjusting your gross earnings lets the employer forfeit the excess match from the plan and apply that amount against future matches for other participants.
Before assuming any of this applies, ask your plan administrator how the plan document defines eligible compensation. Some plans exclude certain incentive payments from the compensation base used for deferrals and matches, which sidesteps the problem entirely. If yours doesn’t, this is territory where a tax professional earns the fee.
Whether the Clawback Is Actually Enforceable
Every tax mechanism above assumes the repayment demand is valid. Courts require the employment agreement to identify the amount subject to clawback and the specific events that trigger it in clear language; vague forfeiture clauses often fall.
State law now plays a growing role. As of 2026, roughly half a dozen states have enacted “stay-or-pay” restrictions that limit or prohibit repayment demands tied to signing bonuses, retention payments, relocation costs, and training expenses when an employee leaves early, with several more considering similar bills. State wage protection laws may also block your employer from deducting a repayment from your paycheck without your written consent. Enforceability turns on the law of the state where you work.
Separate rules apply to executives at publicly traded companies. The Sarbanes-Oxley Act requires CEOs and CFOs to reimburse the company for incentive compensation received in the 12 months after an accounting restatement caused by misconduct,6Office of the Law Revision Counsel. 15 USC 7243 – Forfeiture of Certain Bonuses and Profits and SEC rules finalized in 2022 under Dodd-Frank require listed companies to maintain policies for recovering erroneously awarded incentive pay even without misconduct.7U.S. Securities and Exchange Commission. Dodd-Frank Act Rulemaking – Corporate Governance Issues Tax treatment of the resulting repayment still runs through the Section 1341 framework above.