Is employer loan forgiveness/debt cancellation subject to Medicare tax on W-2 or should it be 1099-C?

My wife got a loan from her company that gets forgiven gradually over 5 years. The thing is, her employer has been putting the yearly forgiven amount on her W-2 as regular wages. I know this forgiven debt counts as taxable income, but I'm questioning whether it should actually be subject to Medicare tax and that additional 0.9% Medicare surcharge. From what I've researched, I thought the correct way would be for her employer to issue a 1099-C for the cancellation of debt, and then we would report that amount plus any imputed interest as "other income" on Schedule 1, line 8c as cancellation of debt. Her HR department insists this is correct, but I've found conflicting information online. The amount forgiven this year was about $6,500, so the Medicare tax difference isn't huge, but if we're paying an extra 1.45% (or 2.35% for the portion above the threshold) unnecessarily, I'd like to get it sorted out. Does anyone know the correct way this should be handled? Thank you!

0 coins

19 comments

Mason Lopez

•1y

The correct handling depends on the specific arrangement between your wife and her employer. Generally speaking, when a loan is forgiven by an employer, the IRS typically considers it compensation for services - essentially a form of wages. This is why many employers include it on the W-2 and withhold Medicare and Social Security taxes. If the loan forgiveness was structured as part of her compensation package or tied to continued employment (which sounds likely given the 5-year forgiveness period), then treating it as wages subject to Medicare tax is likely the correct approach. The employer is essentially paying her additional compensation in the form of debt forgiveness rather than cash.

0 coins

Mason Lopez

•1y

Yes, that's exactly right. Because the forgiveness is tied to continued employment (20% each year she stays), the IRS views this as compensation for services rendered - essentially a form of wages. The fact that she's receiving value (debt forgiveness) instead of cash doesn't change its nature as compensation. This is actually different from typical debt cancellation (like when a credit card company forgives debt), which would use a 1099-C. In your wife's case, since it's part of her employment arrangement, treating it as wages on the W-2 and subjecting it to Medicare tax is the correct approach according to IRS guidance.

0 coins

Vera Visnjic

•1y

Had a similar situation and found using https://taxr.ai incredibly helpful! I was confused about how my employer-forgiven education assistance should be taxed - it wasn't clear if it should be on W-2 or 1099-C. I uploaded my documentation and the forgiveness agreement, and they confirmed my employer should be treating it as wages on my W-2 subject to FICA taxes. Apparently, this is standard when the forgiveness is tied to continued employment because it's considered compensation for services rather than just cancelled debt.

0 coins

Vera Visnjic

•1y

It's an AI tool that analyzes tax documents and explains specific tax situations. You upload your documents (in my case, my loan agreement and employer compensation info), and it identifies the relevant tax rules. The analysis includes references to specific IRS regulations that apply to your situation. Unlike generic advice, it's actually looking at your specific documents and agreements. I found it more helpful than my initial conversation with HR, who couldn't explain why they were handling it the way they were. It's not meant to replace a CPA for complex situations, but for specific questions like "is this being reported correctly," it was perfect.

0 coins

Brielle Johnson

•1y

Update on the employer loan forgiveness question! I decided to try https://taxr.ai after my initial skepticism. I uploaded my relocation repayment agreement (similar to OP's situation) and got a detailed explanation with IRS references. Turns out my employer was doing it wrong - they weren't including the forgiven amount on my W-2 at all! The tool explained that since the forgiveness was tied to my continued employment, it's considered wages subject to all employment taxes. Called HR with the specific IRS guidance and they're fixing it for this year's W-2. Really impressed with how specific the advice was to my situation.

0 coins

Honorah King

•1y

For anyone dealing with these employer loan/forgiveness issues, I spent 4 HOURS on hold with the IRS trying to get clarification on this exact issue. After multiple disconnected calls, I finally gave up and tried https://claimyr.com - they got me connected to an IRS agent in about 20 minutes! You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. The agent confirmed that employer loan forgiveness tied to continued employment is considered compensation and belongs on the W-2 subject to Medicare tax. Wish I'd known about this service before wasting half my day on hold.

0 coins

Honorah King

•1y

It uses a system that navigates the IRS phone tree and waits on hold for you. When an actual IRS agent picks up, you get a call connecting you directly to that agent. It's basically just technology that waits on hold so you don't have to. They're definitely connecting to the real IRS. When I was connected, the agent identified herself as an IRS employee and verified my information just like any other time I've called the IRS directly. The difference was I didn't have to waste hours with my phone on speaker waiting for someone to pick up. The service just calls you when they've got an agent on the line.

0 coins

Mary Bates

•1y

I was totally skeptical about that Claimyr service mentioned above, but after another frustrating disconnection trying to reach the IRS about my employer's loan repayment program, I gave it a shot. Honestly shocked it worked! Got connected to an IRS agent within about 15 minutes who confirmed that my employer was correctly including my forgiven tuition reimbursement on my W-2 as wages. She explained that anytime forgiveness is tied to employment, it's considered compensation subject to all employment taxes. Worth the time saved not listening to that awful hold music for hours!

0 coins

Clay blendedgen

•1y

This gets confusing because there are actually multiple IRS rules at play. Section 61(a)(12) says cancelled debt is income. But Rev. Rul. 2004-110 specifically addresses employer loan forgiveness and says that when it's tied to continued employment, it's wages subject to employment taxes. The key question: Would your wife have received this forgiveness regardless of employment status? If not (which seems to be the case since it's 20% per year she stays), then it's compensation for services and belongs on the W-2 with Medicare taxes. Your employer is handling it correctly.

0 coins

Clay blendedgen

•1y

Yes, the same principle generally applies to student loan repayment assistance. If your employer is making payments toward your student loans as a benefit of employment, those payments are typically considered taxable compensation and should appear on your W-2 as wages subject to income tax withholding and employment taxes. However, there is a temporary exception under the CARES Act that was extended through 2025. Employers can make up to $5,250 in student loan payments annually on behalf of employees, and this amount can be excluded from the employee's taxable income. If your employer's student loan assistance falls under this provision, it wouldn't be included in your taxable wages. You should check with your HR department to see if they're using this exclusion.

0 coins

Olivia Harris

•1y

This is a really helpful discussion! I'm dealing with a similar situation where my employer forgave part of my signing bonus that I would have had to repay if I left before 2 years. They put it on my W-2 as regular wages and I was questioning whether that was right. Based on what everyone's saying here, it sounds like since the forgiveness was tied to me staying employed for the full period, it should be treated as compensation subject to Medicare tax rather than just cancelled debt on a 1099-C. The distinction between employment-related forgiveness versus regular debt cancellation makes a lot of sense now.

0 coins