Bummer Payments: Handling Difficult Situations in Payroll · 2016-10-03 · Loans Interest Free and...
Transcript of Bummer Payments: Handling Difficult Situations in Payroll · 2016-10-03 · Loans Interest Free and...
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
Interest Free and Below Market Interest Rate Loan
• 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
Interest Free and Below Market Interest Rate Loan
• 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
Current Year Repayment
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
Current Year Repayment
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
Prior Year Repayment
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
Prior Year Repayment
• 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
Prior Year Repayment
• 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
Prior Year Repayment
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
Prior Year Repayment
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
Prior Year Repayment
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
New York – Labor Law
§193 Deductions from wages
(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
New York – Labor Law
§193 Deductions from wages
(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
New York – Labor Law
§193 Deductions from wages
(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
New York – Labor Law
§193 Deductions from wages
(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
Adjustments for Overpayments
• 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
Adjustments for Overpayments
• 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
Departments/Agencies
Benefits
Human Resources
Investments
Departments/Agencies
Legal
Accounts Payable
Payroll
Departments/Agencies
Work with other Departments
Establish a Process
Create a Check List
Departments/Agencies
Benefits-Update Beneficiary Forms
Make sure benefits staff review the forms annually
Notify Third Party Vendors
Departments/Agencies
Benefits-
Death Certificate
Continuation of benefits for family
Departments/Agencies
Human Resources-
Notify all Departments
Talk with the family
Coordinate company contributions and notifications
Departments/Agencies
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?
Departments/Agencies
Stock and Investments-
Value of Stock on date of death
Notify Broker
Departments/Agencies
Legal Department-
Contested Beneficiary Information
Difficult Situations
Departments/Agencies
Accounts Payable Department-
Uncashed Checks
Direct Deposit Reversal
Departments/Agencies
Accounts Payable Department-
Obtain needed Tax Forms
Create New Vendor
Departments/Agencies
Payroll Department-
Update Payroll System
Determine Final Payment
W-2 Form
Departments/Agencies
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
State Maximum PayableWho you can make the check payable too
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
Follow Federal Rules
State Law Examples- CT
State Maximum PayableWho you can make the check payable too
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
Follow Federal Rules
State Law Examples- CA
State Maximum Payable
Who you can make the check payable too
Conditions before Payment can be issued
State Withholding
CA$15,000 (including any unused leave or other
compensation)
Surviving Spouse or Conservator
Affidavit of right and proof of identity
Follow Federal Rules
State Law Examples- NY
State Maximum PayableWho you can make the check payable too
Conditions before Payment can be issued
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;
Follow Federal Rules
State Law Examples- NY
State Maximum PayableWho you can make the check payable too
Conditions before Payment can be issued
State Withholding
NY All unpaid wages due
(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
Follow Federal Rules
State Law Examples- NY
State Maximum PayableWho you can make the check payable too
Conditions before Payment can be issued
State Withholding
NY All unpaid wages due
(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
Follow Federal Rules
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?
Processing the Payment
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
Processing the Payment
Pay Day is Friday and employee dies on Thursday.
Processing the Payment
What happens with the payment?
Employer will need to do a reversal or deletion of that deposit
Processing the Payment
Wages Paid out in the same year as the Death
Follow State Law
Calculate Final Payment
Processing the 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.
Processing the Payment
• 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
Processing the Payment
Wages Paid out in the same year as the Death
Report on the Employee’s W-2
Report on Form 1099-Misc
Processing the Payment
• W-2
Processing the Payment
• 1099
Processing the Payment
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.
Processing the Payment
• 1099
Processing the Payment
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