I've been asked many times recently what the difference is between Retro Pay and a "Signing Bonus." I have explained that Retro Pay is computed on the earnings that you have accrued since the amendable date of the contract, whereas a signig bonus is simply a lump sum, the value of which is determined by some more arbitrary method. In other words, Retroactive Pay might be 3% of your Net PAY for the past 4 years, while a Signing Bonus might look like $65,000 if you're a Captain, $40,000 if you're an FO. Simple, and tempting. Add to that an option to pay some of the bonus now, and some at a later date, and the value gets more complicated to assess.


I feel fairly confident that the above is fairly accurate. If I have missed an important aspect of the comparison/contrast, please correct me.


Here's my question: How does Retro Pay affect one's tax liability in contrast to a Signing Bonus?

Let's say I earned $80,000 in the first 2 years after the contract was amendable, and $100,000 in the next 2 years. If I receive Retroactive Pay that reflects a 5% raise, I would be entitled to $4,000 for each of the first 2 years, and $5,000 for each of the next two, for a total of $18,000. How would the IRS treat that? Could I amend my tax returns for these forur years to reflect the small increments in income for each, or would I have to claim the entire $18,000 as income in the current year?

I feel certain that a signing bonus would be treated as income in the present year, and tax would be withheld at the highest rate. Is the same true for Retro Pay, or cannot a tax advantage be gained by spreading it out over the previous years?



Anybody know the answers? Know somebody who knows the answers?






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