Bummer Payments: Handling Difficult Situations in Payroll

Overpayments

Charlotte N. Hodges, CPPOctober 6, 2016

** Current Year **

Overpayments

Repayments

Salary Advances

** Prior Year **

Overpayments

Repayments

Salary Advances

Loans

Interest Free and Below Market Interest Rate Loan

• Loan made to an employee by their employer at an interest rate less than the current applicable federal rate (AFR)

• For loans greater than $10,000

• The difference between the interest paid and the interest that would be paid under the AFR is considered additional compensation to the employee (imputed interest)

• The AFR is established monthly and published by the IRS each month in the Internal Revenue Bulletin - also on IRS.gov or by calling 800-829-4933

Loans


• The taxable amount is subject to social security, Medicare, and FUTA taxes

• The taxable amount is not subject to federal income tax withholding, but must be reported on the employee’s Form W-2

• Loans of $10,000 or less

• Would also be subject to imputed interest if one of its principle purposes is the avoidance of federal tax

Loans


• If the employer forgives the debt, or for any other reason the employee is not expected to repay the loan, the entire balance of the loan becomes income subject to federal income tax withholding and social security, Medicare, and FUTA taxes in the year the loan is forgiven

Reasons for Overpayments

• Late termination notifications

• Leave of absence related errors

• Incorrect pay rates

• Late notification of status changes (change to FTE, exempt status change, etc.)

• Incorrect bonus payments

• Timesheet Errors / Missing Timesheets

Advances and Overpayments

• Included in the employee’s income for the payroll period when received

• Subject to federal income tax withholding and social security, Medicare, and FUTA taxes at the time paid

• Tax treatment of repaid advances or overpayments depends on the type of tax involved and when the employee repays the employer

Current Year Repayment

Employee repays the advance or overpayment during the same year the money was received

• The employee repays the net amount of the advance, overpayment, or repayment

• The employer excludes the amount from the employee’s income when filing the Form W-2


Example

2016

Payments

2016

Repayment

2016

Net Payments

2016

Form W-2

Federal Wages $50,000.00 $5,000.00 $45,000.00 $45,000.00

Social Security Wages $50,000.00 $5,000.00 $45,000.00 $45,000.00

Medicare Wages $50,000.00 $5,000.00 $45,000.00 $45,000.00

FIT Withheld $5,902.50 $1,250.00 $4,652.50 $4,652.50

Soc Sec Tax Withheld $3,100.00 $310.00 $2,790.00 $2,790.00

Medicare Tax Withheld $725.00 $72.50 $652.50 $652.50

Net Pay $40,272.50 $3,367.50 $36,905.00


Additional Tax Aspects

• Repayment made in same quarter overpayment or salary advance occurred

• Do not file Form 941-X, Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund

• Do not file Form W-2c

• Repayment made in different quarter overpayment or salary advance occurred

• File Form 941-X, Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund for the period during which the wages or compensation was originally paid

• Do not file Form W-2c

Prior Year Repayment

Employee repays the advance or overpayment in a subsequent year

• The employee repays the gross amount of the advance, overpayment, or repayment

• The employer refunds any over-withheld social security and Medicare taxes to the employee

• At the employer’s option, the gross amount can be reduced by the amount of social security and Medicare tax over-withheld, or the employer can issue a separate check to the employee refunding the over-withheld amount


Federal Income Tax

•The repayment cannot be excluded from the employee’s income in the year the employee repays the advance or overpayment, or for any year


• The employee may be able to take a deduction from income or a tax credit on his or her personal tax return for the repayment, subject to certain restrictions

• The employer may advise the employee of the total

repayments made related to prior years to help the

employee account for such repayments on his or

her federal tax return


• The employee’s federal taxable earnings and income tax reported on Form W-2 are unaffected for the year of repayment

• The employer must file Form W-2c with the SSA to correct only social security and Medicare wages and taxes, and furnish a copy to the employee

• Do not correct any Additional Medicare Tax withheld on the repaid wages on Form W-2c


Social Security and Medicare Taxes

•Obtain a written statement from the employee stating that the employee will not seek a refund of the social security and Medicare taxes directly from the IRS

Social Security and Medicare Refund

Repayment Letter

Social Security and Medicare Refund

Written Statement


Example

2015 2016 2016 2015 2015

Payments Payments Repayment Form W-2c Form 941-X

Federal Wages $70,000.00 $15,000.00 $5,000.00 N/A¹ N/A¹

Social Security Wages $70,000.00 $15,000.00 $5,000.00 ($5,000.00) ($5,000.00)

Medicare Wages $70,000.00 $15,000.00 $5,000.00 ($5,000.00) ($5,000.00)

FIT Withheld $8,287.50 $640.00 $0.00 N/A¹ N/A¹

Soc Sec Tax Withheld $4,340.00 $930.00 $310.00 ($310.00)² ($620.00)³

Medicare Tax Withheld $1,015.00 $217.50 $72.50 ($72.50)² ($145.00)³

Net Pay $56,357.50 $13,212.50 $4,617.50


Additional Tax Aspects

Repayment made in a calendar year following the one in which the overpayment occurred

• Only recover social security and Medicare taxes

• File Form W-2c with the Social Security Administration to correct only the social security and Medicare wages and taxes

• File Form 941-X to correct the social security and Medicare wages and taxes for the period during which the wages or compensation was originally paid

Federal Unemployment Tax

The employer may be able to claim a refund of overpaid FUTA after the employee repays the advance or overpayment if, after the repayment, the employee earned less than $7,000

If the employee’s earnings exceed $7,000 after taking into consideration the repayment, the employer is still liable for the maximum amount of FUTA tax and the employer is not entitled to a refund

Payroll Deductions

Payroll Deductions

Wage and Hour Division Field Operations Handbook

• Section 30c10 – Voluntary assignment of wages, loans, and advances

(b) Loans and cash advances made by an employer may be deducted from the employee’s wages even where the deduction cuts into the minimum wage or overtime due under FLSA

Payroll Deductions

Wage and Hour Division Field Operations Handbook

• Section 30c10 – Voluntary assignment of wages, loans, and advances

(c) In the situation where an employee is granted vacation pay prior to that individual’s date or the established date of entitlement, with the understanding that such pay constitutes an advance of pay and the employee quits or is terminated before the entitlement date, the employer may recoup the advanced vacation pay, even where such recoupment cuts into the minimum wage or overtime pay required under FLSA.

Payroll Deductions

California

Opinion Letter 2008.11.25-1

Division of Labor Standards Enforcement (DLSE) said that a deduction for previous overpayment of wages is not unlawful under the following conditions.

• There is a written agreement based upon voluntary consent of the employee

• There is no deduction from the final paycheck

• After making the deduction there is no less than the minimum wage for all hours worked in the pay period

Payroll Deductions

New York – Labor Law

§193 Deductions from wages

Permits an employer to make deductions from an employee’s wages for “an overpayment of wages where such overpayment is due to a mathematical or other clerical error by the employer.”

Such deductions are only permitted as follows:

(a) Timing and Duration

• The employer may only recover such overpayments as were made in the eight (8) weeks prior to the issuance of the notice

• The employer may make deductions to recover overpayments for a period of six (6) years from the original overpayment

Payroll Deductions



(b) Frequency

• The employer shall recover overpayments by wage deduction no more frequently than once per wage payment

(c) Method of Recovery

• Overpayments may be recovered through wage deduction or by separate transaction, as long as the procedures of sections 195-5.1(a) and (d) through (i) are followed

Payroll Deductions



(d) Limitations on the Periodic Amount of Recovery

• In such cases where the entire overpayment is less than or equal to the net wages earned after other permissible deductions in the next wage payment, the employer may recover the entire amount of such overpayment in that next wage payment

• Where the recovery of an overpayment exceeds the net wages after other permissible deductions in the immediately subsequent wage payment, the recovery may not exceed 12.5% of the gross wages earned in that wage payment nor shall such deduction reduce the effective hourly wage below the statutory state minimum hourly wage

Payroll Deductions



(e) Notice of Intent

• A notice of intent to make deductions for inadvertent overpayment of wages must at a minimum include:

• The amount of wages overpaid, both in total and broken down by pay period

• The total amount of the overpayment to be deducted

• The date on which each deduction will be made and the amount to be deducted on each date

• Provide notice to the employee that he or she may contest the overpayment, provide the date by which the employee must contest, and include the procedure by which the employee may contest the overpayment and/or terms of recovery, or provide a reference to where such procedure can be located

Payroll Deductions



(f) Procedure

• The employer shall implement a procedure by which the employee may dispute the overpayment and terms of recovery, and/or seek a delay in the recovery of such overpayment

• The failure of an employer to afford this process to the employee will create the presumption that the contested deduction was impermissible

Payroll Deductions

Washington State

WAC 296-126-030

Adjustments for Overpayments

• The employer has ninety days from the initial overpayment to detect and implement a plan with the employee to collect the overpayment

• If the overpayment is not detected within the ninety-day period, the employer cannot adjust an employee's current or future wages to recoup the overpayment

• Recouping of overpayments is limited to the ninety-day detection period

Payroll Deductions

Washington State


• The employer must provide advance written notice to the employee before any adjustment is made

• The notice must include the terms under which the overpayment will be recouped

• For example: One adjustment or a series of adjustments

• The employer must provide documentation of the overpayment to the affected employee or employees

Payroll Deductions

Washington State


• The employer must identify and record all wage adjustments openly and clearly in employee payroll records

• Regardless of the provisions of this section, if appropriate, employers retain the right of private legal action to recover an overpayment from an employee

Payroll Deductions

Virginia

§ 40.1-29 of the Code of Virginia

Virginia Payment of Wage Law

The law prohibits employers from making deductions, other than for taxes or other items required by law such as garnishments, without first securing the employee's written authorization to do so

Payroll Deductions

Maryland

Labor and Employment §3–503

• An employer may not make a deduction from the wage of an employee unless the deduction is:

• Ordered by a court of competent jurisdiction

• Authorized expressly in writing by the employee

• Allowed by the Commissioner because the employee has received full consideration for the deduction

• Otherwise made in accordance with any law or any rule or regulation issued by a governmental unit.

Charlotte N. Hodges, [email protected]

Thank you for listening to me

today and for sharing your

valuable time with me.

What you need to know before Making Deceased Employee Payments

AgendaDepartments/Agencies

Family

State Laws

Payment Processing

Helpful Tips and Resources

Question

Have you ever had to make a deceased employee payment?

Departments/Agencies


Benefits

Human Resources

Investments


Legal

Accounts Payable

Payroll


Work with other Departments

Establish a Process

Create a Check List


Benefits-Update Beneficiary Forms

Make sure benefits staff review the forms annually

Notify Third Party Vendors


Benefits-

Death Certificate

Continuation of benefits for family


Human Resources-

Notify all Departments

Talk with the family

Coordinate company contributions and notifications


Human Resources-

Sending a Condolence Letter

Terminate employee in HR System

Retrieving company property (Badges, Laptops)

Question

Do you have a checklist for making and paying a deceased employee payments?


Stock and Investments-

Value of Stock on date of death

Notify Broker


Legal Department-

Contested Beneficiary Information

Difficult Situations


Accounts Payable Department-

Uncashed Checks

Direct Deposit Reversal


Accounts Payable Department-

Obtain needed Tax Forms

Create New Vendor


Payroll Department-

Update Payroll System

Determine Final Payment

W-2 Form


Payroll Department-

Understand State Laws

Get all Forms needed to process final payout

FAMILY

Family

Get notification of Death

Letter/Package for Family

Meet with the Family if needed

Example of Family Letter

• Dear M ____________:

• On behalf of XXX Corporation, Department of Human Resources, please accept my condolences upon the death of <<first and last name>>.

• This letter summarizes important information regarding M____________’s <<pay; benefits; pay and benefits>>, including actions to be taken by <<XXX Corporation and benefits providers>>, and information requiring your attention. Department of Human Resources staff names and telephone numbers are also included for your convenience. If you desire clarification on any part of this letter or you need assistance, please do not hesitate to call.

• Pay

• M_______________'s final pay and leave payout must be paid to <<his; her>> Estate. To establish the Estate for this purpose, a Certificate of Qualification or Letter of Administration must be obtained from the Fiduciary Clerk of the County in which M______________ resided. Upon receipt of this documentation, XXX Corporation will issue payment to the named Executor or Administrator. A stamped, self-addressed envelope is enclosed for your convenience in returning the requested item. If you have any questions about this matter, please call Linda Dailey in the Payroll Division at (703) xxx-xxxx.

• Health and Dental Insurance

• Your <<health; dental; health and dental>> insurance coverage with XXX Corporation is paid through ____________. You may elect to continue your County <<health; dental; health and dental>> insurance for up to 36 months by participating in the COBRA coverage plan. Detailed information regarding the COBRA plan is included in this package. For more information, contact in the Employee Benefits Division at (703) xxx-xxxx.

• Group Term Life Insurance

• You are named as a beneficiary of M____________'s life insurance policy. Employee life insurance policies are provided by the Standard Insurance Company. A Standard Insurance representative will send you a beneficiary statement form. Please return the completed beneficiary form with a certified copy of the death certificate directly to Standard Insurance. If you have any questions regarding the group term life insurance, contact Jane Smith in the Employee Benefits Division at (703) xxx-xxxx

• If you would prefer to have a staff member meet with you to review this information, please call Susan Kirkman at (703) 324-3302, and she will arrange a meeting. If I may be of assistance to you with this or other County business, please feel free to contact me at (703) 324-3448.

• Sincerely,

• Director, Department of Human Resources

State Law

State Law

Determined by State the employee Lived In

Whom you can Pay

When you can pay

State Law

Determined by State the employee Lived In

What you can pay

Taxability

State Law Examples- VA

State Maximum PayableWho you can make the check payable too

Conditions before Payment can be issued State Withholding

VA $15,000 Successor60 days after death, no qualification of

estate

Follow Federal Rules

State Law Examples- WV


Conditions before Payment can be issued State Withholding

WV

$800: or $5000 if more than 120 days after

death (includes pensions and funds allowed for funeral

cost)

Spouse, Adult Children, Parents, Siblings, or person paying the funeral expenses (in that

order)

Proper Demand and Application; absence of pending probate

proceedings


State Law Examples- CT


Conditions before Payment can be issued

State Withholding

CT All unpaid wages due

Surviving Spouse; if none then next of kin; if

none then funeral director or physician if they have a preferred

claim; or any person the court deems to have

sufficient interest

Small estate not over $40,000. Application

from surviving spouse or next of kin; affidavit of

debt from funeral director or physician or

any other creditor. Transfer or release

discharges of employer's debt


State Law Examples- CA

State Maximum Payable

Who you can make the check payable too


State Withholding

CA$15,000 (including any unused leave or other

compensation)

Surviving Spouse or Conservator

Affidavit of right and proof of identity


http://www.google.com/url?sa=i&source=images&cd=&cad=rja&docid=zWydwKHEgkFyKM&tbnid=rtfrcB7zxdCfhM:&ved=0CAgQjRwwAA&url=http://www.50states.com/flag/caflag.htm&ei=gKpXUY2UCeKA0AHj9IDQDg&psig=AFQjCNGWeQeOGet96R2OGm2dHVxJciT3fw&ust=1364786176268316

http://www.google.com/url?sa=i&source=images&cd=&cad=rja&docid=zWydwKHEgkFyKM&tbnid=rtfrcB7zxdCfhM:&ved=0CAgQjRwwAA&url=http://www.50states.com/flag/caflag.htm&ei=gKpXUY2UCeKA0AHj9IDQDg&psig=AFQjCNGWeQeOGet96R2OGm2dHVxJciT3fw&ust=1364786176268316

State Law Examples- NY



State Withholding

NY All unpaid wages due

(1) Within 30 days of death-designated

beneficiary or if none pay surviving spouse

(in that order)

(1) Within 30 days of death- affidavit from

spouse when wages do not exceed $30,000;





State Withholding


(2) between 31 days and 6 months same as above ( in that order);

a child over age 18, parent, sibling, niece or nephew (in that order)

(2) between 31 days and 6 months after death-

affidavit that states date of death, relationship,

no appt of administrator or executor, name and address of person to

receive the money and can not exceed $15000





State Withholding


(3) after 6 months to death distributee,

creditor or person who incurred funeral

expenses

(3) More than 6 months after death - affidavit

showing date of death, no executor or administrator

appointed, no surviving spouse or minor child or entitlement of payment

and can not exceed $5000


State Law Examples- Other

State Maximum Payable

Who you can

make the check

payable too

Conditions before

Payment can be

issued

State

Withholding

OR $10,000

Surviving Spouse,

dependent child

or their Guardian

No Provision

Wages earned

but unpaid at

the time of

death are

subject to

withholding tax

Processing the Payment

Question

What do you do if a direct deposit that has been sent to the bank but the payment will not be received until after death of your employee?


Employee dies before cashing their paycheck

Employer should reissue the check to the employee’s personal representative/estate

Reported on the employee’s Form W-2


Pay Day is Friday and employee dies on Thursday.


What happens with the payment?

Employer will need to do a reversal or deletion of that deposit


Wages Paid out in the same year as the Death

Follow State Law

Calculate Final Payment


• Example:

• Employee Jane Doe passes away on June 1, 2015. When Jane passed away her employer XXX Corporation owed her $2000.00 in wages and $1000.00 in accrued vacation pay.


• Paycheck Calculation Salary $2,000.00

Accrued Vacation $1,000.00

Final Pay $3,000.00

Social Security Tax $ 186.00

Medicare Tax $ 43.50

Net Check $2,770.50


Wages Paid out in the same year as the Death

Report on the Employee’s W-2

Report on Form 1099-Misc


• W-2


• 1099


Wages Paid out in the year after Death

Follow State Law

No Tax is withheld

Processing the PaymentExample:

Employee Jane Doe passes away on December 28, 2015. When Jane passed away her employer XXX Corporation owed her $2000.00 in wages and $1000.00 in accrued vacation pay. The final payment was made on January 10 2016.


• 1099


Work with Accounts Payable to record payment and information has been verified

Send out letter explaining final payment

Processing the PaymentExample of Sample Letter:

Helpful Tips

Helpful TipsCollaborate with all Departments

Make sure benefit information is updated at least annually

Have a Check List and keep it updated

Helpful TipsKeep an Excel Spreadsheet of Payments Made

Name Vendor # SSN# SAP ID# 1099 Wages/Gross FICA Taxable Wages

Soc Sec Tax

EE

Med Tax

EE FICA Tax Final Payout Comments

Estate of Jane Doe 1212121 123-45-6789 333333

$

10,985.02

$

10,985.02 $ 681.07 $ 159.28 $ 840.35 $ 10,144.67 Deceased in 2015

John Doe 1212123 987-65-4321 444444

$

6,087.15 $ - $ - $ - $ - $ 6,087.15 Deceased in 2014 (prior yr)

$

17,072.17

$

10,985.02 $ 681.07 $ 159.28 $ 840.35 $ 16,231.82

Helpful TipsCoordinate communication with the family

Utilize your reference material to make sure you are following the State Law before issuing the final payment

Be consistent and accurate when responding to the family

Resources

ResourcesAPA Payroll Source

State Tax Websites

APA State Guide to Payroll

Internal Revenue Service website

Corporate Attorney

Your Service Provider

Payroll Subscription Library- Bloomberg BNA, Walter Coulter and others

Question

Did you learn something today that will help you when you have an employee pass away?

Questions

Thank You

Linda Dailey, CPPFairfax County [email protected](703) 324-9413

mailto:[email protected]

Bummer Payments: Handling Difficult Situations in Payroll · 2016-10-03 · Loans Interest Free and...

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