Recovery of Payroll Overpayment
Recovery Method
Once the Payroll Department has calculated the repayment amount to W&M, the employee will receive an email detailing the amount due. The employee can repay the debt by personal check or directly through a payroll deduction (if actively employed) in accordance with state regulations.
Recovery Amount
Current Calendar Year
If repayment is made in the same calendar year as the overpayment, the employee will repay the overpayment’s net pay amount. The Payroll Department will reduce the employee’s wages and associated taxes for that calendar year to ensure the year-end W-2 Form is correct.
Suppose the repayment is made through payroll docking. In that case, the docking schedule may call for partial payments over multiple pay periods, but in no case should the repayment occur over a longer period of time than the overpayment occurred. For example:
- If an employee is overpaid for one period, the employee’s pay should be reduced by the amount of the overpayment in one pay period.
- If an employee was overpaid for four pay periods, the employee’s pay should be reduced over four pay periods to recover the overpayment.
Prior Calendar Year(s)
Suppose repayment is not made in the same calendar year when the overpayment occurred. In that case, the employee must repay the net pay amount of the overpayment plus the associated federal and state taxes. (Taxes are permanently credited to the employee on December 31 and cannot be subsequently recovered by the W&M).
The Payroll Department can only recover the overpaid Social Security and Medicare taxes. Since W&M can recover the Social Security and Medicare taxes, W&M will reduce the repayment amount by those associated taxes, if applicable. To this end, the employee must provide a written statement that they will not request a refund of Social Security and Medicare taxes from the IRS; this is to be done using the FICA Release Letter Form (pdf).
The wages paid in error in the prior year remain taxable to the employee for that year because the employee received and had use of those funds during that calendar year. The employee is not entitled to file an amended tax return for that year. Instead, the employee is entitled to a deduction (or credit, depending upon the amount repaid) for the wages repaid on their personal income tax return in the year of repayment.
Once repaid, the Payroll Department will issue a corrected W-2 Form, reducing only applicable Social Security and Medicare wages and taxes and issuing the employee a W-2c. The Payroll Department, if requested by the employee, can also issue a Statement of Corrected Income which details the amount repaid by the employee and the year repaid. The employee can use this Statement for their current tax return for a credit or a deduction. The employee should consult the IRS Publication 525 (Repayments) with respect to reporting the repayment of wages for a prior year.
Terminated Employees
Overpayments to terminated employees must be collected through W&M’s established collections procedures by the Accounts Receivable Office.
