As physician shortages amplify, more and more physicians are being offered sign on bonuses to incentivize them to join new positions, whether that be for a first job or to make a switch. According to our 2024 salary and negotiation data on signing bonuses for physicians by specialty, these have gone up significantly in size over the past year to reflect market conditions. However, as these sign on bonuses get larger, employers are increasingly placing terms on them related to retention, and asking for payback of all or a portion of the sign on bonus if these conditions are not met. Unfortunately, not all physician jobs work out, and therefore we often see questions about paying back signing bonuses on our physician communities. The problem here is not only coming up with the money, which has often been spent or invested, but also dealing with the fact that you’ve already paid taxes on this money, so you’ll most likely have to work with an accountant to get credit on that money, as employers will expect that you pay back the gross amount that is owned to them, not the net after taxes. Below, we’ll cover this in more detail.
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How are sign on bonuses normally taxed?
There’s a lot of confusion about how signing bonuses are taxed within our physician communities. Part of this is because there are different methods that the employer can choose to use when deciding how to withhold federal taxes. Sign on bonuses are generally supposed to be paid out as W2, even if you haven’t yet started working, in which case the employer typically picks one of two methods to withhold federal taxes, the percentage method or the aggregate method.
The federal withholding tax rate for bonuses in the size that most physicians receive (< $1 million) is usually a flat 22% tax rate. The most common and convenient method for employers is to use the percentage method, where a straight 22% federal tax is applied to the amount of the bonus, regardless of what your normal income tax bracket is.
In the aggregate method, the employer will combine your bonus with your regular income to determine the tax liability, which for many physicians, could push them into a higher tax liability on the front end as you may be pushed into a higher tax bracket for that money.
Note that your actual federal income tax rate that you ultimately pay may differ based on your income and deductions for the year; this is just the amount that is withheld. This is also why residents and fellows are typically encouraged to accept their bonuses during their training year, in hopes that the signing bonus income will fall into a lower marginal tax bracket.
Also always note that in addition to federal taxes, state and local tax rules still apply, and if your state has income tax, it will also be applied here. You should take that into account as well depending on where you live at the time you receive your bonus. Talk to an accountant about the nuances of this if applicable.
Generally, being paid as a W2 for your signing bonus with taxes withheld is to your advantage over being paid out as a flat check without taxes withheld. In this situation, you run the risk of this being counted or reported as 1099 income, which is self employed income and in this case, you will be responsible for both sides of the FICA employment taxes including Social Security and Medicare taxes. While some employers do this for their ease, that is not the way they are technically supposed to do it, as sign-on bonuses are compensation for work that is performed for that employer, even if it is future work, so they should be paying their share of the taxes.
Depending on when the bonus is paid and how it was paid out, you may have to fix it yourself using form SS-8 or a substitute W-2 form to get it in the most tax advantaged way. If you’re reading this before you’ve received the check and you know they’re planning on sending you a check for the full amount, ask them to be paid as W2 instead.
What types of conditions are often put on signing bonuses?
While some employers will still give a signing bonus with no strings attached, we are seeing these become more rare. Nowadays, there are usually stipulations. For example, they may say that as long as you stay for three years, you get to keep your signing bonus, but otherwise you have to pay it back. They may also pay out the signing bonus in installments based on how long you stay, but not have to pay back anything. Or they may pay you the signing bonus all upfront, but prorate how much you get to keep based on how long you stay.
What happens if you leave a job before you’ve fulfilled the obligations outlined in your physician contract for the signing bonus?
This will depend on the terms of your contract, which is why paying attention to the termination clause and the conditions of the signing bonus outlined in your physician contract is so important.
These parts of the contract will outline the stipulations in which you have to (or don’t have to) pay back either all of or part of the signing bonus depending on the amount of time that you’ve been with the employer. As you can probably deduce, this de facto turns into a retention incentive not to leave.
What about the taxes I’ve paid already on my signing bonus? Can I get those back?
Yes, you can, at least most of them. See the next section for logistics.
How exactly do I pay back the signing bonus and get the taxes I’ve paid already on my signing bonus back?
We highly recommend doing this in conjunction with your accountant, as you don’t want to risk doing it wrong (and we’re not accountants, and rules change, so as always, do your own due diligence to double check). However, generally speaking, the process will depend on whether you are paying it back within the same year it was received, or in years after it was received.
Paying back a signing bonus in the year it was received
Although this may seem unlikely, things happen. Examples include because you immediately realize a job is not for you, because you had a change in life circumstances that precluded you from going forward with the job, or because you were overpaid somehow and they’re asking for the money back.
Fortunately, this is the most straightforward situation, as the employer is then responsible for getting the federal and state taxes back from the government with their own accounting.
In this situation, you simply need to pay back the net payment that was received by you, and the employer would show that it was paid back on your W2.
Paying back a signing bonus in years after it was received
This is where it gets more complicated. In this situation, you’ll have to pay back the gross amount that you owe the employer, not the net amount.
There are some nuances to claiming the deduction on your current year tax return depending on the size of the bonus (basically < $3000), but typically speaking with the sizes of most sign-on bonuses, this has not been an issue for most physicians in our community. Of course, talk to your accountant to see what applies in your situation.
If your bonus was greater than the $3000, then there are two ways to get the majority of the money paid in taxes back. You can do this either by claiming a credit on your tax return for the year you pay back the bonus, or you can file an amended return for the year you were taxed on the bonus.
In our experience, most people do the first method, as having to file an amended return can be a pain for you, and perhaps more prohibitively, your employer has to be willing to get involved in the accounting. In that situation you would ask your employer to issue a corrected Form W-2C for the year the bonus was received, which would then remove the amount of the bonus from your taxable income, and then amending your tax return for that year with the new form and new numbers for calculation of taxes owed for the year.
If you do the first method of claiming the credit on your tax return for the year you pay back the bonus, it falls upon you to get those back on your own taxes. The claim of right provision in section 1341 of the IRS tax code allows you to do this. Again, there are some nuances to this, but you basically have to document that you were planning on staying at the job and fulfilling your requirements for the signing bonus when you took the job. Essentially, when you file your current year taxes where you make the repayment, you claim a credit or deduction for the repaid amount.
Logistically speaking, you are going to want to work with your accountant because they will have to recalculate your taxes for the year that you received your bonus without that money, and then report the difference in your tax liability for that year on your tax return for the year you paid it back. That will result in the tax credit.
Note that unfortunately, our understanding is that this does not extend to Social Security or Medicare tax that was paid on this amount, but it’s still the majority of it.
Many states have a similar provision for a credit to allow you to get back the state taxes paid as well.
Is getting a sign on bonus worth it?
There’s a lot of things that are attractive about getting a signing bonus. After all, who doesn’t like more money, and of course, getting a nice big fat check feels great. However, if they come with strings attached and you’re not sure that you’re going to be staying at the job, it may be worth using that negotiating power for other terms that are beneficial to you, such as a higher salary or other perks or benefits. In fact, in our contract negotiations article on sign on bonuses for physicians, we argue that if you don’t need the money upfront, your negotiating collateral may be better spent elsewhere regardless.
Conclusion
While signing bonuses are great, keep in mind that they often come with strings attached. If you’re debating taking one or now have to repay one, it’s important to understand the practicalities of the taxation of sign on bonuses so that you can make sure you’re not coming out of pocket on taxes if you have to pay one back.
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