Payroll Standard Operating Procedure 2.0: Overpayment Processing

Subject: Overpayment Processing

Source: Financial Management Services

Original Date of Issue: September 2010

Date of Last Revision: August 2017

Rationale: To outline the procedures for departments to follow when collecting and processing payroll overpayments.

Procedure

When a department becomes aware that an employee has been overpaid, it must contact their University Payroll Processor immediately via email (IUPUI departments must contact the IUPUI Payroll Office). If the department becomes aware of an overpayment before the check date and the direct deposit can be withdrawn from the bank or the paper check can be cancelled, it is possible to recover the funds and avoid the overpayment process.

If the overpayment is discovered after the check date, it is the responsibility of the department to contact the overpaid employee and arrange for repayment of the overpayment. If the employee has already received the funds, there are various methods for collecting the overpayment amounts outlined in the four situations listed below. The campus payroll office will assist the department in understanding the process and calculating the net payback amount. Any exceptions to the processes and rules listed within this SOP must be approved by University Payroll and University Tax before making agreements with employees.

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. The department (or regional campus payroll office) must prepare the paper adjustment voucher and forward it to University Payroll to begin the process. The department must provide the reason for the overpayment in the explanation section on the adjustment voucher.

A full overpayment requires an email to University Payroll including the following payment details: name, ID, check date, check number, and net amount. It may take University Payroll up to five business days to calculate the net payback amount 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 will be for receiving the payment prior to year-end W-2 processing.

The departmental account will be credited when the funds have been received by the University Payroll and the employee’s record has been updated in HRMS.

Situation 1: Employee is overpaid and would like the payback collected from future wages that will be PAID in the same (tax) calendar year. Note: This does not apply to December wages that will be paid in the following (tax) calendar year.

  1. Departments are encouraged to have the employee complete an Overpayment Acknowledgement & Wage Adjustment Authorization (pdf) before submitting an adjustment voucher to recoup an overpayment.
  2. The department enters an adjustment voucher(s) to be processed in the next on-cycle payroll(s). The adjustment voucher will indicate the pay period that was paid in error and the GROSS amount to be reduced from the next on-cycle check (negative). Keep in mind that if the overpayment involves absent hours, the adjustment may be positive. See the adjustment voucher instructions (pdf) for more detail.
  3. At the University Payroll Director’s discretion, adjustments may be spread over multiple future pay periods provided the total gross overpayment is collected in the same calendar year as the overpayment. 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 $2,000.00 on September 30. Due to the timing of the overpayment, the $2,000.00 can only be split into two payments (October and November) to be collected before the end of the tax year. The department will enter two adjustment vouchers. They will enter the first, to collect $1,000, prior to the October cutoff and the second, to collect $1,000, prior to the November cutoff.

Situation 2: Employee is overpaid and would like the payback collected from future wages that will be PAID in a future (tax) calendar year.

  • The Internal Revenue Service does not allow current year wage reductions to satisfy a prior year overpayment. 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
  • 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, which is not possible.

Situation 3: Employee is overpaid and is going to write a check to Indiana University to repay the overpayment. The personal check will be written in the same (tax) calendar year as the original payment.

  1. The department (or campus) should forward the paper adjustment voucher indicating the GROSS amount the employee should have received to University Payroll.
    1. 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.
    2. 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.
  2. The department receives the employee’s personal check, verifies the payment is correct, and forwards the payment to the campus payroll office. Do not deposit checks or money orders into a departmental account.

Situation 4: Employee is overpaid and is going to write a check to Indiana University to repay the overpayment. The personal check will be written in the following (tax) calendar year.

  1. Whether the overpayment includes the full or partial payment amount, University Payroll must calculate the overpayment amount.
    1. If the overpayment was a partial amount, the department or campus should prepare an adjustment voucher indicating the GROSS amount the employee should have received and forward to the payroll office for a partial overpayment
    2. A full overpayment requires an email to University Payroll including payment details: name, ID, check date, check number and the net amount. University Payroll will calculate the NET overpayment amount that should be included in the personal check and communicate this amount to the campus or department.
  2. Federal, state, and local income taxes, garnishments, and Tax Deferred Accounts (TDAs) 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
  3. 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 University 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 the employee does not submit the refund form, Social Security and Medicare taxes will be included in the repayment amount.
  4. The department receives the employee’s personal check, verifies the payment is correct, and forwards the payment to the campus payroll office. Do not deposit checks or money orders into a departmental account.

Cross Reference:

Responsible Organization: Financial Management Services