Overpayments: How Do I Handle? Overpayments Happen! How Overpayments Happen API Fund for Payroll Education, Inc.

Transcription

1 Overpayments: How Do I Handle? 2018 API Fund for Payroll Education, Inc. Overpayments Happen! How Overpayments Happen

2 How Overpayments Happen How Overpayments Happen Keying errorrs How Overpayments Happen Overpayments aren t always the result of mistakes

3 Sometimes, it may just be the great unknown It s not the overpayment that needs handling It s the REPAYMENT Overpayments must be included in the employee s income for the payroll period when received and are subject to: Federal income tax Social Security tax Medicare tax

4 Wage & Hour Requirements Deducting Overpayments Fair Labor Standards Act Restrictions: Minimum Wage Overtime

5 Fair Labor Standards Act Below minimum wage? Yes, to recover errors Fair Labor Standards Act Below minimum wage? Consider spreading out the recovery period

6 We mistakenly paid a salaried, direct deposit employee twice and can t recover the funds. Can we just skip the next payment? DOL Answers Exempt employees Cannot reduce the current salary Voluntary deduction agreements are permitted Example 1: Rhonda is an exempt employee with a salary of $1,000 per week In error, Rhonda s employer overpays her $2,000 (an additional $1,000) Employer cannot recover overpayment by skipping a week or reducing her salary Employer can arrange a voluntary deduction payback arrangement or ask Rhonda to repay

7 DOL Answers Nonexempt employees May be taken below minimum wage due to employer error Consider spreading out the recovery Example 2: Sherri, a nonexempt employee, is overpaid in error $600 Employer can deduct the amount from her earnings, even if it takes her below the federal minimum wage Consider spreading the recovery to reduce a financial hardship State Laws Be aware! Some states are more restrictive Carefully check state laws where your employee works

8 Taxation Requirements on Repayments If repayments are made in the current year they can offset current year payments Example 3: Nolan works 40 hours weekly and earns $700 Last week he worked 40 hours and was paid a total of $1,000 ($300 in error) Employer reduces Nolan s earnings by $300 from this week s pay $700 - $300 = $400 $ = $10.00 per hour Employer is in compliance with FLSA

9 Example 3: Employer s system will automatically adjust social security and Medicare taxes Income tax will be based on $400 gross pay Nolan should monitor his federal income tax and can adjust, if needed, using Form W-4 Same Calendar Year Allow deductions for repayments In same calendar year of repayment Same Calendar Year Obtain a receipt from the employee

10 Same Calendar Year Obtain current year credit by filing Form 941-X if repayments were made in a subsequent quarter If repayments are made in a subsequent year it requires special tax treatment Example 4: In 2018, employer discovers a $500 overpayment made to employee Tara in 2017 Appropriate federal taxes were withheld Employer asks Tara to repay gross amount Employer can t recover federal income tax withheld in a prior year

11 Example 4: Employer asks Tara for a written consent to file a claim for the overwithheld taxes Employer also asks for a written statement from Tara stating she has not or will not claim a refund or credit for the overcollection of social security and Medicare taxes Employer files Form 941-X for the quarter(s) involving the overpayment for a refund of employee and employer taxes Example 4: Employer could instead repay Tara the overpaid taxes and ask for a written statement stating she has not or will not claim a refund or credit for the overcollection of social security and Medicare taxes Employer files Form 941-X for the quarter(s) involving the overpayment for a refund of employee and employer social security and Medicare taxes Example 4: Employer files Form W-2C showing only the corrections for 2017 to social security and Medicare wages and taxes (not federal income tax) Employer may also file a claim for refund of the overpayment of FUTA tax, if applicable

12 Year After Overpayment Employee s repayment refund includes: Social security and Medicare tax Obtain a receipt from the employee Year After Overpayment Employer cannot claim credit for FIT FIT was included on employee s personal income tax return Any tax withheld representing Additional Medicare tax is treated the same as FIT Employee s Unreimbursed FIT

13 FIT Recovery Information Employee may be able to claim a credit of the tax repayment See 2018 IRS Publication 525 when released Example 5: Fred (Current Year) Hired July 3, 2018 Salary $3,000 monthly Sign-on bonus $1,000 Repay net bonus if resigns within one year Example 5: Fred (Current Year) Quit November 30, 2018 Repaid net $673.50

14 Example 5: Fred (Current Year) 2018 Payments 2018 Repayment 2018 Net Payments 2018 Form W-2 Federal Wages $16, $1, $15, $15, Soc. Sec. Wages $16, $1, $15, $15, Medicare Wages $16, $1, $15, $15, Federal Inc. Tax $2, $ $2, $2, Soc. Sec. Tax $ $62.00 $ $ Medicare Tax $ $14.50 $ $ $12, $ $11, Net Pay Example 5: Fred (Current Year) Fred s Form W Example 5: Fred (Current Year) Employer files 3rd Quarter Form 941-X

15 Example 5: Fred (Subsequent Year) Hired July 3, 2017 Salary $3,000 Sign-on bonus $1,000 Repay net bonus if resigns within one year Example 5: Fred (Subsequent Year) Resigned March 29, 2018 Repaid net $ Example 5: Fred 2017 Payments 2018 Payments (Subsequent Year) 2017 Repayment in Form W-2c 2017 Form 941-X Federal Wages $19, $9, $1, N/A N/A Soc. Sec. Wages $19, $9, $1, ($1,000.00) ($1,000.00) Medicare Wages $19, $9, $1, ($1,000.00) ($1,000.00) Federal Inc. Tax $3, $1, $ N/A N/A Soc. Sec. Tax $1, $ $62.00 ($62.00) ($124.00) ($14.50) ($29.00) Medicare Tax Net Pay $ $ $14.50 $14, $6, $673.50

16 Example 5: Fred (Subsequent Year) Employer can t claim FIT refund on 941-X Example 5: Fred (Subsequent Year) Fred May claim credit on Form 1040 Employer Cannot claim FIT refund from IRS Must request from Fred Example 5: Fred Employer claims Employer and employee Social security and Medicare taxes Fred must sign statement (Subsequent Year)

17 Example 5: Fred (Subsequent Year) Employer receives $ from Fred $ from IRS ($76.50 to Fred) $ total Employer faces loss Fred s $ FIT Example 5: Fred (Subsequent Year) Employer must get $250 from Fred to recover FITW Best to require gross pay repayment in agreement State Legislation

18 AK WA VT NH MN ID UT PA IA NJ OH IL IN WV VA CO KS MO KY NM OK DC AR SC GA MS AL LA TX FL HI DE MD NC TN AZ RI CT MI NE CA MA NY WI SD WY NV ME ND MT OR States with Legislation Addressing Recovery of Overpayments California It shall be unlawful for any employer to collect or receive from an employee any part of wages theretofore paid by said employer to said employee. (CA Labor Code 221) Illinois If the employee agrees The entire amount may be deducted on the next regular payday Or a repayment agreement is required

19 Indiana Overpayments may be deducted from wages Two weeks notice May not exceed limits Lesser of 25% of disposable weekly earnings or the amount exceeding 30 times the federal minimum wage Overpayment is 10 times gross wages (decimal point misplacement), entire overpayment may be deducted immediately Kansas Signed written agreements are required to recover overpayments Maine May not deduct more than 10% of net pay without written permission Full amount, if employee resigns

20 Massachusetts Pending Legislation: Two week notice required Only recover overpayments made eight weeks prior to notice Voluntary written agreement not to exceed 10% of gross (unless voluntarily opted otherwise in advance) If more than 500 MA employees were affected by a payroll system failure, provide notice to the state attorney general within one week, including course of action Michigan May deduct within 6 months: Mathematical miscalculation or error By employer, employee, or representative Written explanation Not greater than 15% of gross After deductions required by law or CBA Does not take wages below federal or state minimum wage (whichever is greater) Minnesota Written authorization Stating the amount deducted each pay period May not exceed legal limits

21 New Hampshire Voluntary payments permitted Written permission Begins one pay period after agreement Specifications Dates recovery will begin and end Amounts to be deducted Agreement whether deduction can be made from final pay New York Overpayments not in accordance with final State Department of Labor regulations may not be deducted Timing and duration Frequency Method of recovery Limitations Notice of intent North Carolina Without written authorization Miscalculation or errors Requested advances Principal amount of loans Shortages or damages (if guilty after indictment or arrest)

22 Oklahoma Permitted to recover payroll overpayments Voluntary payroll deduction agreement Rhode Island Written or electronic approval required Unless authorized by federal or state law, or court order Texas Employee must return any overpayment to the Company as soon as possible. Overpayments are regarded as an advance of future wages and will be deducted in whole or in part from the next available paycheck(s) until fully repaid. Employees are expected to sign an authorization agreement to deduct

23 Virginia Written signed authorization required Except for payroll taxes or other items required by law Washington May recover only within 90 days of overpayment