Salary Overpayments. Taxable income includes all wages actually or constructively received in a tax year.

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1 Salary Overpayments Taxable income includes all wages actually or constructively received in a tax year. When an overpayment is discovered, the district must notify the employee. The notification should include the following information: 1) Amount of overpayment 2) Reason for overpayment 3) Period of overpayment 4) Repayment schedule and agreement A repayment agreement must be signed by the district and the employee before collection of any monies. If the employee refuses to sign a repayment agreement, the employee would then be advised that legal action may be taken to recover the overpayment. A current year overpayment must be recovered within the same tax year to be reflected on the current W-2. When the employee repays the employer the following tax year, they may claim a deduction on line 22, Schedule A (Form 1040) of $3,000 or less. Over $3,000, they can take deduction or a credit against their tax. In this case, the employer does not issue a corrected W-2. Reference IRS Publication 525: pdf/p525.pdf Section 451 of the Internal Revenue Code states that the amount of an item of income shall be included in the gross income of the employee for the taxable year in which the employee received the income unless, under the method of accounting used in computing taxable income, such amount is to be properly accounted for in a different period. Regulation states that under the cash receipts and disbursements method of accounting, items of income are includible in gross income when actually or constructively received. Under section 461 of the Code, any deduction or credit for income tax purposes is allowed only for the taxable year that is the proper taxable year under the method of accounting used in computing taxable income.

2 THE RECOVERY PROCESS Current Calendar Year When excess income is repaid during the same calendar year, the amount can be excluded from gross income and the employer can apply a credit to the employee for the withheld federal and state income, Social security and Medicare taxes attributable to the excess income pursuant to section 6413(a) of the Code. The employer should obtain and keep a written receipt showing the date and amount of the repayment [regulation (a) 1(a) and (a) 1(b)]. Prior Calendar Year When employees repay excess income in a subsequent calendar year, the employer does not credit withheld federal or state income taxes attributable to the excess income in the prior year. If the employee does not repay excess income until a subsequent year, the employee is required to report on his or her personal income tax return the excess income in the previous year, but is entitled to a deduction in the amount of the repayment in the subsequent year. However, the employee is given credit for the repayment by the employer for social security and Medicare taxes on the excess income received in the prior year when a corrected W-2 is filed. The employer should obtain and keep as part of its records a written statement that the employee has not and will not claim any refund or credit for such overpayment of social security and Medicare taxes [regulation (a) 1(b)(1)]. The employer reports the repayment for Social Security and Medicare tax on Forms W-2c and that is issued to the employee on the repayment is received in full. Employees are entitled to a deduction on their personal income tax return for the amount they repaid from income in the year in which it was repaid. If the amount of repayment is $3,000 or less, employees should deduct it from their income on line 22, Schedule A (Form 1040), in the year it was repaid. If the amount of repayment is over $3,000, employees can take a deduction for the amount repaid, or they can take a credit against their tax (see IRS Publication 525 for instructions). Under the latter circumstances, the employee should use the method that results in less tax.

3 (DISTRICT LETTERHEAD) Date Dear : This is to advise you that pay warrant(s) number(s) for the period(s) issued resulted in an overpayment of $. This error was due to:. Please reference the enclosed documentation. Please submit a personal check for the overpayment payable to:. Attach the payment to this notice and return it to the Payroll Department via district mail or mail if to the address shown above. If you have any questions or would like to make an appointment to make other repayment arrangements, please call at. Sincerely, Payroll or HR Supervisor

4 Date: To: Payroll Department District From: Subject: Salary Repayment Agreement I,, understand the explanation of the salary overpayment made to me in the amount of $. I hereby authorize the district to deduct $ each month from my wages to offset this indebtedness. I further understand that should I terminate employment before liquidating this overpayment, the balance is due and payable at the time of termination. Employee Signature Date

5 Instructions for Form 113 Instructions for completing Form 113 Salary Overpayment Computation and/or W 2 Correction Current Calendar Year Employee reimburses by personal check: 1. Pay Period: The month in which the pay warrant was issued (ex: M01). 2. Issue Date: The issue date of the pay warrant (ex: July 31, 2017). 3. Full Gross/Taxable Gross: Line (A): from the Payroll Register or Review Paycheck Line (B): what the employee should have been paid. Note that on line B, the taxable gross will calculate automatically. 4. Social Security and Medicare: Pre tax 125C deductions and workers compensation are not subject to Social Security and Medicare. When recalculating for Social Security/Medicare tax, account for these deductions. 5. Fed W/H and State W/H: TSAs, Pre tax 125C deductions, workers compensation, retirement contributions and Alternative Retirement System (ARS) are not subject to Federal and State withholding. When recalculating Federal tax, account for these deductions. Note: It is allowable to recalculate State taxes on an overpayment when processed in HCM.

6 6. PERS or STRS wage/contrib.: Line (A) Was paid (from Payroll Register): Top line: Wages paid that were subject to Retirement. Bottom line: PERS or STRS contributions paid. Line (B) Earned: Top line: The wages employee should have been paid that are subject to Retirement. Bottom line: The PERS or STRS contributions the employee should have paid. Contact Retirement Reporting if you have questions on how to calculate retirement on an overpayment. PERS: 7% of wages subject to Retirement (Classic Members) 6.5% of wages subject to Retirement (PEPRA Members from 7/1/17) STRS: (Classic Members) 8.00% of wages subject to Retirement (6/30/14 and prior) 8.15% of wages subject to Retirement (7/1/14 through 6/30/15) 9.20% of wages subject to Retirement (7/1/15 6/30/16) 10.25% of wages subject to Retirement (7/1/16 6/30/18) STRS: (PEPRA Members) 8.00% of wages subject to Retirement (6/30/14 and prior to 1/1/13) 8.15% of wages subject to Retirement (7/1/14 through 6/30/15) 8.56% of wages subject to Retirement (7/1/15 6/30/16) 9.205% of wages subject to Retirement (7/1/16 6/30/18) Note: As of 1996, Retirement wages must be manually calculated due to TSA calculations performed on the left side of the pay warrant stub.

7 7. Other deductions: Line (A): Total of all other deductions. Do not include net ACH net tovendor deductions such as MFCU, SDCTCU, etc. Total deductions must include tax deferred deductions, from the left side of the pay stub. Be aware that any tax deferred 125C contributions will affect the calculations for Social Security/Medicare tax as well as Federal/State tax. Line (B): This amount should match Line (A). 8. Line (A B): Overpayment line: Net identifies the amount the district needs to collect from the employee. This amount should be the Full Gross less Social Security tax, Medicare tax, Federal tax, State tax, Retirement contributions, and other deductions. Current Calendar Year Employee Reimburses through Payroll: Only complete the columns: Full Gross and PERS or STRS Wage/Contrib. This is because HCM will recalculate Social Security, Medicare, Federal, and State taxes on each payment made. 1. PERS or STRS: Use the wages amount (top line) in the PERS or STRS wage/contrib. column to calculate the retirement contributions. Note: Do not recalculate Social Security tax, Medicare tax, Federal W/H tax, and State W/H tax. 2. Repayment through payroll within the same calendar year as the overpayment. 3. Send Form 113 directly to Retirement Reporting, Room 605 attn: Carolyn Squeo so PERS or STRS wages and contributions can be adjusted on the next available payroll cycle.

8 Prior Calendar Year Employee Reimburses by Personal Check: Note: In compliance with IRS code 451, cannot be processed through payroll. 1. Line (A) Was paid: complete this row using the amounts from the original warrant. 2. Line (B) Earned: Recalculate Social Security tax, Medicare tax, and PERS or STRS contributions. Do not recalculate Federal W/H, State W/H, TSA, 125C, or other deductions. 3. Complete W-2c. When the district receives money from the employee for a prior calendar year overpayment, the correct IRS process is shown in the following example: 1. District completes Form 113, Salary Overpayment Computation and W-2 Correction. 2. District issues a W-2c/W-3c for the prior year, correcting only Social Security wages/taxes and Medicare wages/taxes. District does not correct wages, tips, and other compensation. 3. District submits Form 113 and the appropriate W-2c/W-3c to the County Office, Retirement Reporting SS/MED/W2c unit. 4. Employee reports the repaid amount on his/her personal income tax return (Form 1040). IRS considers it a repayment of amounts under a claim of right. A. If the repayment amount is $3, or less, it is a deduction (Schedule A). B. If the repayment is over $3,000.00, a calculation is made to determine whether to take it as a deduction (Schedule A) or as credit to taxes (Form 1040). 5. Refer to IRS Publication 525 Taxable and Nontaxable Income (Repayments) and Instructions for Form 1040.