My employer overpaid me about $2,500 net last year. I discovered this when I went through pay slips for my tax filing and I informed HR immediately. The company is now asking me for a $4,000 check. They want me to pay them the gross amount and then reclaim the tax from tax agency. Can they do this? I don’t see why I should go through all this hassle (and pay a tax preparer) when they made a mistake (that they didn’t even realize until I brought it up). Thanks.
Ann Kiernan replies:
Yes, you do have to pay it back! As for how, I am not a tax lawyer, so I checked with the payroll processing company ADP. They recommend that overpayments be deducted from future paychecks, and that the employee sign a written consent for the deductions, typically 15% of gross pay. That avoids the hardship of having to cough up a lump sum.
The tax question is a bit more tricky. If the overpayment and repayment occur in the same calendar year, payroll should automatically adjust the withholding taxes. But if they occur in different years, which sounds like your situation, you have to declare the overpayment as income, then claim the repayments as deductions next year. Check IRS Publication 525 for more information, or better yet, get tax advice from an accountant or attorney. ADP recommends that the employer seek the refund of Social Security and Medicare taxes, with the employee’s consent, but please ask your tax advisor about that, as well.
I agree that, as a matter of fairness, you should not have to pay for the tax advice that you need as a result of the employer’s error. So, when you propose your installment repayment plan, go ahead and ask for reimbursement of your CPA and/or legal fees.
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