Overpayment Recovery

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Anonymous Member posted 04-08-2024 18:35

This message was posted by a user wishing to remain anonymous

I've read some posts on this forum about recouping over payments and have a few questions.

1) What happens if the overpayment occurred in 2023 and the employee had 401K deferral, what about a current year deferral? Can you focus only on the gross repayment?

2) The IRS states you can offset the repayment against current year wages if the overpayment was for wages in the current year. If it's in the same quarter, can you simply reduce the gross pay to recoup the funds. For example, if $2500 is the normal b/w pay, can you simply adjust a subsequent pay period gross to $2000 if $500 was overpaid for a prior pay period if the amount was agreed upon by the employee? Can you do the same if it's for a prior quarter.

3)The IRS also states overpayment from prior year can also be paid in current year and that the repayment must be the gross amount also. I understand a w2c to correct ssa wages need to occur, but how do you process this in payroll to reflect the repayment? Can you reduce the gross the same way as above example in "2)" meaning reduce gross of 2500 by $500 overpayment?

4) Someone recently posted overpayment state rules. The rule is based on the state in which the employee is taxed and not the lived in state, correct?

Needing some guidance on how to proceed to fix this rather quickly.

Thank you in advance.

Employee reporting of repayment.

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The wages paid in error in the prior year remain taxable to the employee for that year. This is because the employee received and had use of those funds during that year. The employee isn't entitled to file an amended return (Form 1040-X) to recover the income tax on these wages. Instead, the employee may be entitled to a deduction or credit for the repaid wages on their income tax return for the year of repayment. However, the employee should file an amended return (Form 1040-X) to recover any Additional Medicare Tax paid on the wages paid in error in the prior year. If an employee asks about reporting their wage repayment, you may tell the employee to seeRepaymentsin Pub. 525 for more information.\"

https://www.irs.gov/publications/p15#en_US_2024_publink1000202539

Thanks, Pam

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Raeann Hofkin, CPP posted 04-09-2024 10:42

Good Morning,

You may receive more responses if you explain what happened. When I deal with overpayments, I try to keep it simple. First, what state was the employee working? That's the state rules to follow. Some states do not allow you to take back the overpayment without the employee's approval. Other states allow you to take back the overpayment as long as you pay them at least minimum wage for the hours they physically worked.

#1 - Can/will the vendor refund the overpayment? If not, I don't know that there is anything you can do about this, it depends on the vendor.

#2 - If you are deducting this year, it just lowers the taxable wages for this year. Don't make it more difficult than needed. Nobody wants to refile their taxes because they had to repay funds this year from last year. You paid them last year, they paid taxes on those wages. This year, you take it back and it lowers taxable wages.

#3 - if you were taking it back this year, you do not need the W2C as it will just lower taxable earnings this year. Take the gross amount, it lowers taxable wages, nothing more to do.

#4 - state in which the employee works.

Raeann Hofkin, CPP

Anonymous Member posted 04-09-2024 13:57

This message was posted by a user wishing to remain anonymous

@ Raeann and anyone else, I agree more information.

We have a handful of employee (s) that are salaried exempt and were overpaid wages due to a system glitch that was payroll oversight. A handful of employees have 1-3 checks between Quarter 3 2023 and Quarter 1 2024 that were overpaid. I agree with what you are saying to keep it simple and just reduce the gross and this is what I'd like to do. What is I don't file a W2C for 2023 like the IRS guidelines state a w2C has to be filed for the previous year, do you just reduce the gross repayment for this year and last year as payments are made? Is there something else I'm missing? I cannot make the records correct for 2023. Thank You

Raeann Hofkin, CPP posted 04-09-2024 14:50

You asked - "do you just reduce the gross repayment for this year and last year as payments are made? Is there something else I'm missing? I cannot make the records correct for 2023."

I wouldn't do anything to 2023. 2023 is done and the funds were not paid back in 2023. They are being paid back in 2024. Just reduce the gross from this year by the amount being paid back. For example, if there was a $500 overpayment in 2023 and the employee earned $1,200 in the next pay, you would just reduce the gross wages by $500 and tax them on the $700 that is left.

Raeann

Pamela Hughes, CPP posted 04-10-2024 17:30

This is what the IRS states in Puclication 15 a repayment of prior year wages:

"Repayment of prior year wages.

If you receive repayments for wages paid during a prior year, report an adjustment on Form 941-X, Form 943-X, or Form 944-X to recover the social security and Medicare taxes. You can't make an adjustment for income tax withholding because the wages were income to the employee for the prior year. You can't make an adjustment for Additional Medicare Tax withholding because the employee determines liability for Additional Medicare Tax on the employee's income tax return for the prior year.

You must also file Forms W-2c and W-3c with the SSA to correct social security and Medicare wages and taxes. Don't correct wages (box 1) on Form W-2c for the amount paid in error. Give a copy of Form W-2c to the employee.

Employee reporting of repayment.

https://www.irs.gov/publications/p15#en_US_2024_publink1000202539

Thanks, Pam