When a department becomes aware that an employee has been overpaid, they should contact the campus payroll department immediately. If it is prior to the check date and the direct deposit can be withdrawn from the bank or the paper check can be cancelled, it is possible to recover the funds and avoid the overpayment process.
It is the responsibility of the department to contact the employee and make arrangements for repayment of the overpayment. If the employee has already received the direct deposit funds into his account or cashed the actual check, there are various methods for collecting the overpayment amount following the guidelines listed below. The department must prepare a paper adjustment voucher and forward it to the payroll office to begin the process. Please state the reason for the overpayment in the explanation section on the adjustment voucher. For a partial overpayment the adjustment voucher should reflect a POSITIVE (+) entry for the CORRECT gross using the correct earn codes, hours, etc. that the employee should have received for the pay period. A full overpayment requires an email to the payroll office including payment details: name, ID, check date, check number, and net amount. It may take the central payroll office up to five business days to complete the calculation after the adjustment voucher is received.
Overpayments should be processed as quickly as possible to avoid year-end tax problems for the employee. If the overpayment occurs in December, contact the campus payroll department to see what the deadline is for receiving the payment prior to year-end W-2 processing. The campus payroll office role will be to assist the department in understanding the guidelines and calculating the overpayment amount. The departmental account will be credited when the funds have been received by the payroll office and the employee’s record has been updated in HRMS. Any exceptions to the guidelines listed below should be discussed with the campus payroll office prior to making agreements with an employee.
Guideline 1: Employee is overpaid and would like the payback deducted from future wages that will be PAID in the same (tax) calendar year.
Guideline 2: Employee is overpaid and would like the payback deducted from future wages that will be PAID in a future (tax) calendar year.
Department must enter adjustment voucher to be processed in the next on-cycle payroll. Adjustment voucher will indicate the pay period that was paid in error and the GROSS amount to be deducted from the current check (negative).
Note: This does not apply to December wages that will be paid in the following (tax) calendar year.
- At the campus Payroll Director’s discretion, adjustments may be spread over multiple future pay periods provided the total gross overpayment is deducted from payrolls that will be paid in the same calendar year as the original payment. The department will need to decide how many pay periods are appropriate and enter adjustment vouchers for each pay period indicating the GROSS amount to be deducted. The adjustment vouchers must be entered prior to voucher cutoff to allow processing time.
Example: A monthly paid employee was overpaid $2000.00 on September 30th. The 2000.00 can only be split into 2 payments and collected back from October and November wages. They do NOT have the choice to deduct from the December payment since those wages are paid in the following tax year. The department would enter an adjustment voucher to deduct $1000.00 before the October cutoff and $1000.00 before the November cutoff.
The Internal Revenue Service does not allow for current year wage reductions to satisfy a prior year overpayment. Supporting document: See IRS Publication 15, Circular E, Employer’s Tax Guide, Instructions for 941, Prior Period Adjustments, Wage Repayments: http://www.irs.gov/pub/irs-pdf/p15.pdf
Note: Wages for the current tax year cannot be reduced from the December check because it pays in January of the future tax year. Example: Employee overpaid on 11/30 check and would like the December wages reduced- Not possible.
Guidline 3: Employee is overpaid and is going to write a check to Indiana University to repay the overpayment. The personal check is going to be written in the same (tax) calendar year as the original payment.
Department should forward the paper adjustment voucher indicating the GROSS amount the employee should have received to the payroll office. If the overpayment was a partial amount, the payroll office will calculate the NET overpayment amount that should be included in the personal check and communicate this amount to the department. A full overpayment requires an email to the payroll office including payment details: name, ID, check date, check number and the net amount. The payroll office will calculate the NET overpayment amount that should be included in the personal check and communicate this amount to the department.
The department will verify the payment received from an employee is correct and will forward the payment to the campus payroll office. The check should not be deposited into a departmental account.
Guideline 4: Employee is overpaid and is going to write a check to Indiana University and check is going to be written in the following (tax) calendar year.
Regardless if the overpayment includes the full or partial payment amount, the payroll office must calculate the overpayment amount. The department should prepare an adjustment voucher indicating the GROSS amount the employee should have received and forward to the payroll office for a partial overpayment. A full overpayment requires an email to the payroll office including payment details: name, ID, check date, check number and the net amount. The payroll office will calculate the NET overpayment amount that should be included in the personal check and communicate this amount to the department.
Federal, state, and local income taxes, garnishments, US Savings bonds and Tax Deferred Annuities (TDA) will be included in the payback amount if the W-2 process has already been started for the calendar (tax) year. A corrected W-2 will not be issued to reduce the taxable income for federal, state, and/or local taxes. See Internal Revenue Code Section 1341 for information on “Restoration of amounts received or accrued under claim of right." You can direct employees to the following: IRS Publication 17, Your Federal Income Tax: Section: Other Income; Repayments. This is for the individual’s use in claiming a deduction or a credit in the year they repaid the income: http://www.irs.gov/pub/irs-pdf/p17.pdf
Social Security and Medicare taxes will not be included in the payback amount if the employee returns a completed “Request for Prior Year FICA Refund” form. This form is located on FMS Tax's list of tax forms.
The employee will receive a corrected W-2 to reflect the reduction in Social Security and Medicare wages/tax only. The refund form is required by the IRS and provides the university authorization to recapture the employee portion of the FICA taxes from the IRS. If we are unable to recapture the employee portion of the taxes from the IRS, we will not be providing the refund of those taxes to the employee by way of excluding those taxes from the computed payback amount and the employee would be responsible for repayment of the Gross amount of the check.
- The department will verify the payment received from an employee is correct and will forward the payment to the campus payroll office. The check should not be deposited into a departmental account.
Individual campuses may have additional campus specific procedures. For clarification, please check with your campus payroll office.