State and Federal Laws and Regs Cover How – and Whether – to Recoup
Payroll Overpayment. Even the most well managed payroll department can manage to overpay their employees. Whether the overpayment is due to human error or perhaps a benefit payout before a departed employee rightfully earns that time, one simple fact remains: Overpayments can – and do – happen and must be handled properly.
Payroll professionals, human resources and accounting personnel, business owners, lawmakers, attorneys, or absolutely any individual or entity responsible for correcting overpayments made to employees, heed this warning: Recouping overpayments is much more complex than just adhering to the Internal Revenue Code (IRC)!
State Law, Employee Status & Wage Considerations
The first questions to arise when an overpayment surfaces usually relate to the IRC and IRS regulations. The concern often lies in how to handle an overpayment that occurred in a current versus a previous tax year, and whether the rules differ for federal income tax compared to social security or Medicare taxes. While these are important considerations, the IRS isn’t your number one concern.
Wage and hour law compliance must also be honored when dealing with overpayments. Before the payroll department identifies IRS requirements, you must first determine if recouping the overpayment is even legal under the Fair Labor Standards Act (FLSA). Issues such as exempt employee status, minimum wage and overtime rules for nonexempt employees must be considered when recovering overpayments from employees. For example, FLSA requirements on recouping overpayments include an important 1998 opinion letter that spells out these requirements.
And let’s not forget state laws, as each individual state has its own compliance issues involving wage and hour laws! For example, you could be faced with a time limit for recouping the overpayment. Some states require that an employee be notified in advance of the deductions, and other states just say “NO!” to the whole process.
But Don’t Forget The IRS!
If this sounds like a complicated matter, it is. With different overpayment types and a litany of regulations, there are a host of variables to consider when handling payroll blunders. Once you’ve got those details ironed out, though, you still have the tax code to manage.
For example, you need to have a working knowledge of how a 1990 IRS Private Letter Ruling on handling overpayments applies today. Do you know how to properly correct overpayments in the same calendar tax year? For prior year overpayments, is it better to ask for the gross or the net check? And are you able to correct FICA taxes for a prior year overpayment? Each type of tax needs to be handled differently – and you need to know how to handle each one.
(This post first appeared in a ProfEd blog)
By Amy P
