Though it may be a pleasant surprise to see your paycheck looking heftier than usual, if the money doesn’t belong to you, your employer has the right to take it back. Though the overpayment gave you a higher than normal take-home pay, the net amount did not include any taxes; your overpayment is in your net wages, not in your taxes. Since you did not receive the taxes that were deducted from the overpayment, you should not have to pay your employer back for any taxes. If your employer already paid its share of taxes on the overpayment, it must go through the respective agencies to recover the overpaid taxes.
The U.S. Department of Labor allows employers to recover overpayments even if the deduction causes your pay to drop below minimum wage. Your employer does not need your consent to make the deduction, which may happen over one pay period or a series of paychecks. The state in which you work may have strict rules on how employers can recover overpayments. For example, in Indiana, an employer must notify the employee at least two weeks before making the deduction, which generally cannot exceed 25 percent of the employee’s disposable earnings.
Employee Tax Adjustment
When you repay the overpayment, it decreases your annual taxable wages, and the taxes that you paid are refunded to you. For example, along with receiving your regular salary of $600 for the week, you were overpaid by $200. If your employer deducts the $200 overpayment from your next check, your salary for that week decreases to $400. This results in your paying fewer taxes than if you received $600; your payroll records should reflect a credit for the taxes associated with the overpayment. If you pay back the overpayment directly via check or money order, your employer should adjust your wage and tax records so they show the repayment and the adjusted taxes.
Impact on W-2
If you repay the overpayment in the same year that it occurs, your W-2 should reflect the adjustment for the overpayment. For example, if the overpayment occurs in 2013 and you repay the amount in 2013, your 2013 W-2 should be correct and should not show the overpaid wages. If the overpayment happened in 2012 and you repaid it in 2013, it does not impact your 2013 W-2 wages or taxes. In this case your employer should give you a corrected W-2, or W-2C, for 2012 showing the amounts you repaid. You then use the corrected W-2 to amend your 2012 taxes.
Employer Tax Recovery
To recover its share of taxes that it paid because of your overpayment, your employer needs to follow the revenue agency’s requirements. For example, if your employer deposited more than the right amount of taxes to the Internal Revenue Service for the quarter, the IRS can refund the overpayment to your employer or apply it on your employer’s next return. When your employer completes its quarterly Form 941, it should indicate on line 15 the overpayment method it wants the IRS to apply.
Grace Ferguson has been writing professionally since 2009. With 10 years of experience in employee benefits and payroll administration, Ferguson has written extensively on topics relating to employment and finance. A research writer as well, she has been published in The Sage Encyclopedia and Mission Bell Media.