If a sign-on bonus is paid say in 2009 subject to the employee completing 18 months of services - meaning that the employer considers the sign-on bonus due and payable in full if the employee quits or strikes during this time. Is the sign-on bonus taxed as ordinary income in the year received? Or should it be spread over the course of the 18months? Or should it be declared as income in the year that it is fully vested? Please advise.

Your bonus is taxable in the year you receive it. If you start your job in 2009 and your employer writes you a check in 2009, then it's income in 2009. If he pays you only after you complete your 18 months of service in 2010, then it's taxable in 2010.

What if you quit yr job and you are asked to pay back the bonus?

It will be a problem for you. You will probably be asked to pay back the full amount of the bonus - even the portion that was withheld for taxes - so your cash flow may suffer a bit. If you are contemplating this, you should ask how payrol would treat the reimbursement - will they report lower overall earnings on your W2 (which would be the most convenient way for you, as it would allow you to get the withheld portion back when you file your tax return)? If they don't do this, your only recourse is to claim the repayment as a unreimbursed business expense on your federal taxes, and get your refund through this deduction. But this leaves you short with respect to getting back any state taxes, social security, and medicaire taxes that were withheld. Bottom line - don't take the bonus if you think you're going to quit.

The year you receive bonus, it will be reported as income on your W2. So you also report the income in that year.

When you return the bonus, it should again be reported as negative income on your W2 that is your salary income will be reduced by this amount. This is what you will report in that year.