KPMG report: Practical tax mechanics of implementing SEC clawbacks

Tax mechanics of implementing a repayment to the employer of previously paid compensation

Tax mechanics of implementing a repayment to the employer of previously paid compensation

While employer clawbacks of previously paid bonuses or other similar compensation are not particularly novel, the recently expanded Securities and Exchange Commission (SEC) rules requiring public corporations to apply clawback policies in certain instances involving financial restatements will expand the scope and presumably the frequency of clawbacks. Although the notion of a compensation clawback is conceptually straightforward (the employee simply must repay amounts previously received) a repayment may raise unforeseen complexities—given that employment taxes typically have been withheld from the original payment, along with payments to employee benefit plans, which reduced compensation payments based on specific formulas applied under that plan—that must now be accounted for as part of the total repayment.

If, as expected to be most common, the repayment occurs in a tax year after the year of the original payment, the tax consequences of the repayment generally must be taken into account separately in the year of the repayment, raising additional complexities for employers. Likewise, there will be income tax consequences to the employee on the repayment, including questions about whether relief may be available under section 1341, providing more favorable tax consequences to the restoration or forfeiture of amounts previously taxed under a claim of right. As with all wage payment adjustments, especially those involving multiple years, the process can seem daunting since it may involve the interplay between different types of returns spread among several tax years.

Read a January 2024 report* [PDF 910 KB] prepared by KPMG LLP professionals that outlines the tax mechanics of implementing a repayment to the employer of previously paid compensation.

* This article originally appeared in Tax Notes Federal (January 15, 2024) and is provided with permission.




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