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What am I missing?

edited February 2009 in Stupid Questions
I think I missed the boat on this one.

I just seen a news story about a large company paying too much (and too little) severance, is now asking former employees to pay back the overpayments.

They are warning that if they don't pay it back, there will be tax consequences. This could be true if the company did not take tax withholdings at time of payment, or they are going to change the taxation when they don't get the overpayment back.

We here are quite perplexed, and would appreciate any insights as to why the company thinks there is tax consequences.

Comments

  • well, there are tax consequences to being paid more than you were supposed to - you have to pay tax on the additional income. Furthermore, if you do end up having to pay back the money and it is in a year subsequent to the year you were overpaid, the recovery of the overpaid tax becomes a bit tricky since the prior year 1040 would not be amended. The repayment might trigger a credit or a deduction in the year of repayment, but, gee, marginal tax rates are a bit lower and some incomes are lower - particularly for those laid off (with severance) because the jobs aren't there - so you could end up recovering less than you paid.
  • Agree, there are really only "consequences" IF part or all of it is paid back in a year subsequent to the overpayment.

    Personally, I'd tell that company to go jump. Or worse. :x
  • Oh, yeah. I was thinking as the payments were made this year, there probably wouldn't be any repayments in a later year.

    Thanks!
  • Patty,
    There is also the tax consequece of having to pay more tax because you have more income - this could lead to such horrific consequences as phase out of itemized deductions or exemptions, taxablility of more social security income, not being able to make deductible contributions to an IRA, or the thing that scares most people the most "being pushed into a higher tax bracket". :roll:
  • Looks like they have decided to let the ex employees keep the extra money. Maybe they figured taxes out on the original amounts and then gave them the extra tax free? If that was the case then there would be fairly big consequences since the overpayments were $4,000 to $5,000.
  • I'm not sure where the "tax free" comes in - the additional income is taxable income regardless of withholding - and I am sure the company withheld - what it might argue is that since the additional income was not supposed to be "wages" it is forgiveness of debt and the employer's share of the FICA may also be income to the former employees - but that is stretching it a bit.
  • Patty,
    There is also the tax consequece of having to pay more tax because you have more income - this could lead to such horrific consequences as phase out of itemized deductions or exemptions, taxablility of more social security income, not being able to make deductible contributions to an IRA, or the thing that scares most people the most "being pushed into a higher tax bracket". :roll:

    Oh, NO!!!!!!!!!!!! :twisted:
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