I received a substantial overpayment of a guaranteed bonus in February 2008 that was not detected until March of this year (2009). I do not have the money to repay my employer who has suggested that I repay it immediately on a pretax basis. They have suggested that I will then get a credit against my 2009 taxes. To complicate matters, the original incorrect payment was related to a distribution of shares in October 2007 that are now worthless. What are my obligations to repay? Am I responsible for their error?

Depends. If the overpayment can be proven as a result of contractual provisions, then yes they can ask for it back.

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Originally Posted by ScottGem

Depends. If the overpayment can be proven as a result of contractual provisions, then yes they can ask for it back.

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Thank you. Is there a time limit in which they must identify the error? I live in New York. Is it appropriate for them to request pre-tax funds. Given that I was overpaid in shares, can I just give that number of shares back?

If you do repay the bonus, the company should issue you a corrected W2 form for 2008, so that you can properly file your 2008 federal and state income tax, and also claim a refund of the social security and medicaire taxes that were withheld. The problem with doing as they suggest (writing a check for the full amount) is that you can deduct the repayment from your federal taxes only if you itemize, and that doesn't take care of the state tax, social security, or medicaire taxes that were withheld.

You should propose that you will return the stock and write them a check for the taxes withheld IF they will give you a corrected W2.

As for whether you are responsible for their error - no, your not. But I can't believe that you didn't recognize this error yourself back in February 2008. You were hoping they woiuldn't notice, right?

Yes it will have to be repaid,

How much over was it,