Handling Overpayments and Payroll Deductions Presented by: Ed Wasserman

Another Airline Story

Overview Constructive Receipt Doctrine Salary Overpayments Claim of Right Rule Wage Offset Method Payroll Deductions-General Rules Payroll Deductions-Salaried

Constructive Receipt Doctrine Wages generally are taxable and subject to employment tax when actually paid or made available to employees without limitation.

You Got Overpaid

You Have to Pay it Back

Salary Overpayments Two Methods Claim of Right Rule Wage Offset Method

Salary Overpayments, con’t. Claim-Of-Right rule applies to repayments that are repaid in a subsequent tax year

Claim of Right Rule Special Tax Rules apply when a taxpayer has an obligation to repay certain amounts received in a prior tax year. Salary overpayments of $3,000 or less, if not repaid in current year, can have a negative tax consequence to employees

Claim of Right Rule Overpayments are deducted after tax, not before tax. Special tax treatments for overpayments more than 3K.

Claim of Right Rule Many employers ignore this rule. Can result in employer penalty and interest assessments by the IRS.

Claim-Of-Right Rule W-2C is prepared in year the repayment is made. W-2C shows reduction in FICA and MEDICARE. 941c is prepared Employees claim FIT wage adjustment on federal tax forms.

Claim-Of-Right Rule The FIT wage adjustment for $3K or below is deducted the year it is repaid on 1040 or schedule A, line 28. For $3K or above, you may take the adjustment the year you originally included it in income. (refer to IRS pub 525 page 36 for calculation).

Claim-Of-Right Rule Employer required to refund FICA taxes relating to the repayment. Employer must obtain affidavit from employee stating they received a refund of FICA tax from employer and the employee WILL NOT claim credit from IRS. Employer claims credit for both employee and employer on next deposit liability (941)

Wage Offset Method If the repayment occurs in the same tax year, the wage offset method is used.

Wage Offset Method Reduce taxable wages by overpayment.

Payroll Deductions Legally Required Employer’s Convenience Voluntary request of Employee Reductions from Salaried Employees

Payroll Deductions Legally Required Wage Garnishments Social Security Taxes Income Taxes

Payroll Deductions Employers may choose to permit employees to voluntarily elect to have wages deducted from pay for a variety of reasons

Payroll Deductions-Voluntary Union Dues Charitable Contributions Tools Uniforms Savings Bonds

Payroll Deductions In general, no deductions may be made (except board or lodging) that result in a weekly wage less than minimum wage

Payroll Deductions Authorizations should be in writing Individual States may require a statement of deductions with each paycheck (usually a pay stub)

Payroll Deductions Meals, lodgings. Deductions from wages may be taken for the reasonable cost of meals, lodging, or other facilities provided to employees, even if the deduction would reduce the wages paid below the minimum wage rate.

Payroll Deductions Taxes. Payroll taxes assessed against the employee which the employer is required to collect may be counted as wages paid under the FLSA and deducted from an employee's pay. Taxes assessed against the employer may not be deducted.

Payroll Deductions Tardiness. Docking for tardiness or lateness is permitted so long as additional penalties for tardiness do not result in a wage payment that is less than the applicable minimum wage.

Payroll Deductions Benefit programs Contributions on the part of employees to pension, health and welfare plans may be deducted from wages even if it cuts into minimum and overtime pay. Employers are permitted to make them only if the employee voluntarily assents.

Payroll Deductions Court orders. Deductions from wages for payments to third parties under a court order of garnishment, wage attachment, trustee process, or bankruptcy proceeding are permitted. Amounts withheld may not exceed applicable garnishment laws.

Payroll Deductions Garnishment. The Consumer Credit Protection Act also restricts deductions from wages. Under the Act, wages are subject to garnishment to the extent of 25 percent of weekly disposable earnings or the amount by which such earnings exceed 30 times the applicable minimum wage, whichever is smaller.

Payroll Deductions Losses. Deductions from an employee's paycheck for losses due to breakage, spills, cash register shortages and bad checks generally cannot be taken if the effect of the deduction is to reduce the employee's pay below the applicable federal or state minimum wage rate.

Payroll Deductions Overpayments. Deductions for overpayments of wages made during a prior pay period are allowed if the prior overpayment is due to a legitimate bookkeeping error, even if the deduction reduces the employee's effective wage rate for the current pay period below the minimum wage rate. If the deduction would cause the employee financial hardship, then the Wage-Hour Division urges that the repayment be spread out over a period of time.

Payroll Deductions, Salaried Employees An employee will be considered to be paid on a "salary basis“… which amount is not subject to reduction because of variations in the quality or quantity of the work performed

Payroll Deductions, Salaried Employees Exempt employees need not be paid for any workweek in which they perform no work

Payroll Deductions, Salaried Employees If the employee is ready, willing and able to work, deductions may not be made for time when work is not available.

Payroll Deductions, Salaried Employees Deductions from pay may be made for absences of one or more full days for personal reasons. Can not be less than full day increments.

Payroll Deductions, Salaried Employees Can deduct for absences due to sick time if the company has a bona fide sick policy providing salary replacement. What if the “sick pay bank” is exhausted?

Payroll Deductions, Salaried Employees Deductions from pay of exempt employees may be made for penalties imposed in good faith for infractions of safety rules of major significance. Safety rules of major significance include those relating to the prevention of serious danger in the workplace or to other employees, such as rules prohibiting smoking in explosive plants, oil refineries and coal mines.

Payroll Deductions, Salaried Employees Deductions from pay of exempt employees may be made for unpaid disciplinary suspensions of one or more full days imposed in good faith for infractions of workplace conduct rules

Payroll Deductions, Salaried Employees A deduction from pay as a penalty for violations of major safety rules may be made in any amount.

Payroll Deductions, Salaried Employees An employer is not required to pay the full salary in the initial or terminal week of employment

Payroll Deductions, Salaried Employees An employer is not required to pay the full salary for weeks in which an exempt employee takes unpaid leave under the Family and Medical Leave Act.

Payroll Deductions, Salaried Employees When calculating the amount of a deduction from pay, the employer may use the hourly or daily equivalent of the employee's full weekly salary or any other amount proportional to the time actually missed by the employee

Overpayments and Payroll Deductions Comments or Questions