Payroll Overpayment Challenges:

Legal and Practical Implications

Presented By:Dayna J. Reum, CPP, FPC, PetSmart Inc.

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mail: P.O. Box 509 Eau Claire, WI 54702-0509 • telephone: 866-352-9539 • fax: 715-833-3953email: customerservice@lorman.com • website: www.lorman.com • seminar id: 391743

Payroll Overpayment Challenges:

Legal and Practical Implications

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mail: P.O. Box 509 Eau Claire, WI 54702-0509 • telephone: 866-352-9539 • fax: 715-833-3953email: customerservice@lorman.com • website: www.lorman.com • seminar id: 391743

Prepared By:Dayna J. Reum, CPP, FPC, PetSmart Inc.

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Dayna J Reum CPP, FPC

Payroll Overpayment Challenges: Legal and Practical Implications

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Introductions Who am I

What to expect from today

Agenda Introduction Type of Overpayments Regular pay/Bonuses Loans/Advances Non-cash overpayments

Tax Considerations Overpayments in the current year Overpayments in a prior year Year end Reporting

Federal & State Law Minimum Wage State Laws Methods of Repayment

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Overpayments OverviewWhere do you start?How was the payment originally paid?When was the payment originally made?When was the overpayment discovered?Will the employee pay back the overpayment?When will the employee pay back the

overpayment?

Challenges of docking payHourly Salary

Types of Overpayments Regular Pay/Bonuses Regular pay partial check or entire check overpayment Method of taxation Payroll System Other payments made on the same payroll Bonus Gross up Types of Bonus

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Types of Overpayments Advances Preparation before Advance is given Properly define advances versus loans Advances are taxed when given Draws against Commission

Loans Loans are only tax free when given if they are truly handled as a

loan according to IRC Loans that are given to employees at interest rates lower then the federal

interest rate are considered below market value, compensation related loans. The amount of the difference between the interest charged the employee and the federal interest rate must be included in income on any day in which the combined amount of all outstanding loans between the employer and the employee is more then $10,000.

Types of Overpayments Loans Taxable amount is not subject to federal tax but is reportable on

the Form W-2 Taxable amount is subject to SS, Medicare and FUTA tax If the loan is forgiven or not paid back to the employer the

entire amount of the loan is taxable Employer Stock Loans Employer loans for tuition

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Types of Overpayments Non-Cash Overpayments Cash drawer shortages Corporate Credit Cards Equipment Theft

Withholding paystubs or checks from employees till items are returned Modify payment methods

Types of Overpayments Relocation Agreement should of covered employment requirements and

repayment method before relocation assistance is provided.

Tuition Assistance Possible loan Employment agreements

Business Expenses Unpaid overages Expenses not justified

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Tax Considerations Overpayments in the current year Overpayment can be excluded from taxable income when paid

back in current year. Gross vs. net repayments Gross up’s

Tax Considerations Overpayments in the prior year Overpayment can not be excluded from taxable income Employee should pay gross overpayment back to the employer. “Claim of Right Rule” Refund of Social Security and Medicare taxes Keep in mind social security wage base

Written Receipt claiming employee will not claim SS and Med taxes back from the IRS

FUTA can get refund but need to keep in mind $7000 wage base

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Tax Considerations Year End Reporting When was the overpayment repaid When was the overpayment repaid What year end reporting requirement should be kept in mind if

employer forgives overpayment. Could an overpayment be considered a loan for reporting purposes?

W-2 vs.W-2C Letter of taxes (employee SS and med refund from the IRS)

Federal & State Law Minimum Wage Deducting overpayments from pay Never take any employee gross pay under minimum wage when taking

back overpayments.

Always have total owed and deduction amounts in writing with the employee’s signature before amounts are deducted from pay.

Pay special attention to terminated employees

Pay special attention to associates that are on leave.

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Federal & State Law State Laws California-. Under California law, an employer may lawfully deduct the

following from an employee’s wages: Deductions that are required of the employer by federal or state law, such as income taxes or garnishments.

Deductions expressly authorized in writing by the employee to cover insurance premiums, hospital or medical dues or other deductions not amounting to a rebate or deduction from the wage paid to the employee.

Deductions authorized by a collective bargaining or wage agreement, specifically to cover health and welfare or pension payments. From CA DOL website

Illinois-Only certain deductions are allowed under Illinois law. Deductions may be made when: (1) required by law (such as taxes); (2) to the benefit of the employee (such as health insurance premiums, union dues etc.); (3) a valid wage assignment or wage deduction order is in effect; (4) made with the express written consent of the employee, given freely at the time the deduction is made. 820 ILCS 115/9. From IL DOL website

Federal & State Law Methods of Repayment Gross repayment Method Net repayment Method Reduction in Salary/Hourly wages Direct Deposit Reversals 5 banking days from the original date of entry

Single entry reversals only

Require employee to be notified no later then the settlement date of the reversal

Pay card Reversals

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Dayna J. Reum CPP, FPC

daynaprtraining@live.com

Questions??

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Notes