How to handle overpayment of earnings in payroll

Question:  I overpaid an employee too much in an earnings code. How can I correct this?
 
Answer: 
The best way to handle an overpayment depends on if the employee has another payroll or if they are willing to return the money.
 
Scenario 1 – Employee has future payrolls
 
This scenario assumes that the employee will continue to receive payroll checks from the company. If this is the case, you can adjust down the earnings on future checks. You cannot enter a negative amount of earnings. Adjusting down future earnings will reduce the amount of earnings and taxes the employee receives on that check. This should allow you to bring their earnings in line on a Year to Date basis. It will also correct taxes automatically. This is the preferred method as it is easier.
 
There are two ways to do this

1. Reduce the amount of pay they receive on the timesheet. Depending on the type of earning codes they use this may not be possible (i.e. they are salaried). If possible, you should be reducing the pay on the same earnings code that they were overpaid with. You cannot create a new earnings code and put negative amounts on it. You can reduce the amounts of other earnings codes if desired.
2. Reduce the pay by going to review/modify calculated payroll. After the payroll has been calculated go to Activities>Payroll>Review/Modify calculated payroll. Go to the earnings tab and reduce the amount of pay that they receive. When you click save it will ask if you want to recalculate taxes. In most cases you should say yes, otherwise the amount of tax collected and reported will be higher than the earnings.

 
Extra Consideration –
If you file monthly or quarterly payroll reports to a government agency and the recapture of overpayment spreads across reporting periods, the employee will show as having more in one period and less in another. This isn’t necessarily a problem since it is an accurate reflection of how the employee was paid.
 
Question- What if the employee’s next check isn’t large enough to cover the amount of overpayment?
 
Answer - This method can be used even if the employee doesn’t have enough earnings on the next check to cover the amount of the overage. Simply spread the pay reduction across multiple checks. If for some reason that isn’t going to work, then go to Scenario 2.
 
 
Scenario 2 – The Employee is able to return the money
 
If the employee can return the money, then it can be handled this way:

1. The employee writes a check to the company. This check is received in accounting. It is coded to cash and then to all the payroll accounts that were overpaid (payroll expense, tax liability etc).
2. Go to Payroll>Activities>Setup/Adjust Employee Balances. On the various tabs you make negative adjustments of the amount overpaid.

For example, if you overpaid the employee $100 then you would make a -$100 adjustment to earnings. You would also go to the taxes tab and adjust down the various taxes. For example, Social Security Taxes Gross and subject earnings would be decreased by $100 as well as reducing the employee and employer taxes paid by -$6.2. For items like FIT and SWT the Gross and Subject earnings would be reduced by $100, and you will have to make a calculation or estimate on how much the tax should have been reduced.
These payroll adjustments will NOT transfer to accounting. That is what the accounting adjustments in step 1 are for.
 
Question – What if the employee will not be receiving any future payrolls and is unable to return the money?
 
Answer – What to do about that situation would be a management decision, but from an accounting perspective that employee has effectively been paid that much money, so no additional actions would be taken in accounting or payroll. The full amount of money that was paid to them should be reported as taxable income.