Recovering Salary Overpayment – Tax Compliance

Recovering Salary Overpayment – Tax Compliance

Recovering Salary Overpayments Current Process • Returned Check (AC230) • Negative Additional Pay Earnings (OVP) • Retroactive Calculations • Negative Time Entry Earnings

IRS Regulation • IRS Publication 515: Repayment of wages in the current year that were originally overpaid in a prior year can not reduce the tax liability of the current year.

Issue • OSC is currently underpaying and under reporting Federal, Social Security, Medicare, State and Local taxes • New York State is at risk of sustaining a large liability for back taxes, interest and penalties • Employees who are repaying overpayments through OVP are underpaying taxes and could be required to pay back taxes, interest and penalties

Federal Withholding Tax The IRS requires taxes to be withheld in the year wages are received; the IRS does not allow repayment of wages, previously taxed in a prior year, to be considered in the calculation of tax withholdings for the current year. The IRS may allow a current tax deduction or credit for prior year wages that are repaid

SS/Med Tax The IRS uses the amount of wages and tax as well as the year it was earned to determine benefits. All wages are considered earned in the year they are paid – with the exception of wage repayments When overpayment of wages of a prior year are repaid, IRS does acknowledge that they were overtaxed in the prior year But because the employee had the benefit of the money in the prior year, they cannot reduce the current year tax obligation

IRS Requirements IRS requires that the W2 for the prior year be corrected to reflect the reduced SS/Med wages and withholdings The employer is required to return the SS/Med taxes to the employee and issue a credit letter The IRS requires that the Employer’s SS/Med Quarterly Filing for that year be corrected

Tax Problem As a result, OSC need to know the year the original overpayment occurred. The year will determine if the repayment can be considered in calculating FWT and SS/Med Tax

Solution • Different earn code for each year • Set tax attributes of the earn code that are appropriate for either a current or prior year

More Specifics • Create the following earn codes • Q10 – Overpayments 2010 • Q09 – Overpayments 2009 • Q08 – Overpayments 2008 • Q07 – Overpayments 2007 • Q06 – Overpayment 2006 and prior • Create Q11 for Jan. 2011 • Only Q11 will update taxable earnings • Create Q12 for Jan. 2012 • Change Q11 for Jan. 2011 to be a prior year code

Transition • Full Compliance Jan. 1, 2011 • OVPs that will be fully recovered by 2011 – no action • OVPs for Terminated, Deceased, Retired – update by OSC • OVPs for Active, Leave or Paid Leave – Updated by Agency

Converting Existing Overpayments • Convert only those overpayment records that will not be satisfied in the final 2010 paycheck • A Control-D report will be provided to assist in identifying those records to convert • Determine when the original overpayment occurred based on check date • The overpayment may have occurred in a single year or multiple years • End the original overpayment record using the last day of the preceding pay period

Converting Single Year Overpayments • Create a new overpayment record using the appropriate new overpayment earnings code • Begin the new overpayment record using the first day of the pay period • Transfer the Earnings, Goal Amount and Goal Balance from the original overpayment record

Converting Multiple Year Overpayments • Create new overpayment records using the appropriate new overpayment earnings codes • Begin each new overpayment record using the first day of the pay period • Determine the original overpayment amount for each year • The Goal Amount on each new overpayment record should reflect the overpayment amount for the year corresponding to the record’s overpayment earnings code

Converting Multiple Year Overpayments (cont.) • The Goal Balance of the original overpayment record may be transferred to the Goal Balance of a single new overpayment record or divided between multiple new overpayment records • The employee receives the greatest benefit if the total Goal Balance is transferred to the oldest overpayment record • Caution: Do not apply a Goal Balance that is more than the employee owes on that record

Converting Multiple Year Overpayments (cont.) • Determine the total Earnings amount to be collected each pay period (usually 10%) • The Earnings amount may be applied to a single new overpayment record or divided between multiple new overpayment records • If the employee has an overpayment record for the current year, collecting the total Earnings amount from that record provides the employee the greatest benefit

Converting Multiple Year Overpayments (cont.) • Once an overpayment record has been satisfied, the Earnings amount must be transferred to another overpayment record or records • A Control-D report will be provided to identify employees with multiple unsatisfied overpayment records • If an employee has an overpayment record for a prior year and is then overpaid in the current year, the employee receives the greatest benefit if the current year overpayment is collected first

What Will Change • Withholdings will change January 2011 – Q06 through Q10 • Refunds of SS/Med only requested for Q07 – Q10 • Form W2Cs Issued to employee/IRS • Credit Letter issued to employee • Refund will be paid to employee when received from IRS • Employee may take a Federal Tax Deduction

Impact on Employee • Q06 – Q10 – Net pay will decrease • Q11 – Net pay will decrease January 2012 • Employees will get SS/Med refunds for the taxes associated with the amount recovered • Employees will get a credit letter

Questions?

Recovering Salary Overpayment – Tax Compliance