Help! I’ve Accidentally Overpaid an Employee – and 5 More Payroll Mistakes to Avoid

Of all the acceptable mistakes one can make, those involving numbers and other people’s money rank highest in the “oops” category.

Payroll mistakes are actually quite common, with around a third of employers making noticeable errors in their calculations; thankfully, the process is entirely reversible.

Here is a quick breakdown on what to do if you’ve accidentally overpaid an employee.

Paycheck Inaccuracy

Any time you overpay an employee—whether it be a one-time error, a failure to compensate for estimated time worked versus actual time worked, or a long-time recurring issue—your primary concern should be getting that money back as quickly as possible. The IRS tends not to look kindly on payroll infractions, meaning you’ll need to work fast in order to avoid incurring hefty fines. To that end, you’ll need to deduct the appropriate amount from that employee’s future paychecks.

Retrieving lost pay isn’t as simple as withholding paychecks until you settle the score; the Fair Labor Standards Act (FLSA) has a series of regulations dictating what you can and cannot do with an employee’s paycheck in order to safeguard their assets, which means you’ll need to comply with any official strictures.

You also have state-specific ramifications to consider. For example, if your employee works in New Jersey but lives in a neighboring state, New Jersey law governs your pay deduction protocol. Be sure to consult your state’s legislature regarding pay deductions, since state-specific rules vary considerably from one another.

Notify Your Employee and the IRS

The first thing you’ll need to do is contact the affected employee directly—in person, if at all possible—and explain the situation to them. Apologize, then walk your employee through the pay deduction process. Some states require you to acquire written consent for a pay deduction, while others simply mandate notification—again, check your state’s legislature before implementing any form of pay deduction.

You’ll also need to notify the IRS as soon as possible—preferably the day of the discovery—to make sure you don’t accrue long-term fees.

From this point, how you balance your payroll is contingent on the situation and its context.

With most one-time slip-ups, you’ll be able to right the balance within a week or two with the employee’s subsequent check, whereas recurring issues may set your employee back several pay periods. Regardless of the situation, though, it’s important to resolve the red in your ledger as quickly as possible.

5 Common Payroll Mistakes

Payroll mistakes are messy, and they rarely resolve themselves expeditiously; in fact, more than one payroll error in a year can result in employees seeking alternative employment. Additionally, making a mistake with your payroll can cost your company countless hours—and dollars—to resolve.

We’ve already covered a frequent payroll error: inaccuracy. If you’d like to hold onto your employees and avoid hefty legal fees, here are few more common payroll mistakes you should try your best to avoid.


You’re probably aware that some of your employees aren’t actually “employees” in the traditional sense. Classifying contractors, temporary hires, or freelancers as employees is a common error—one that can result in fines, overpayment, and even an audit; since your full-time employees use W-2s and everyone else uses a 1099 for tax purposes, misclassifying employees can ultimately have a disastrous outcome.

Organization and an updated contract for temporary employees are probably the two best ways to combat this error. If both you and your contractors understand their status within your company from day one, you’ll run less of a risk of misclassifying, misreporting, and withholding the wrong amount of tax money.

Unpredictable Overtime

Overtime is only a pleasant surprise for employees, and only come payday—and, if you’re not staying on top of your payroll, they don’t even get that satisfaction. Unfortunately, failing to pay employees overtime on time can, like every other mistake on this list, lead to anything from general dissatisfaction to federal fines.

Using an automated payroll clock and forecasting for hours can help you stay on top of your overtime hours even when they come as a surprise, and making sure you’re compliant with state and federal law regarding overtime will prevent the rest of the aforementioned logistical headache. Remember, having employees account for their hours is a convenience for both them and you.

Multi-State Messes and Regulatory Changes

Whether you have multiple physical locations or simply employees who live and work remotely in a different state, accounting for different states’ regulations and individual pieces of legislature along with your own can prove challenging—and, like anything else on this list, will net you steep fines should you fall out of compliance. Fortunately, most automated payroll options or outsourced payroll services will account for these disparities for you.

If hiring an external payroll team or updating your current system isn’t an option for you, keeping up with multi-state regulatory changes can be extremely challenging. If at all possible, make sure that any future hires have the proper qualifications to juggle payroll, your state’s legislative changes, any other relevant states’ changes, and federal alterations. Having a background in tax processing can help, so look for candidates in that area. Remember, outsourcing your payroll to a service such as Abacus Payroll, Inc. is often a cost-effective way to ensure that your employees get paid, your business meets state expectations, and you walk away with a degree of satisfaction. If you’re encountering state or regulatory problems, outsourcing really is your best option if updating your payroll isn’t feasible.

Compensation, Fringe Benefits, and Travel

Have you taken a big picture look at your employee’s entire compensation package? Things like bonuses, gift cards, prizes, and awards are taxable. Though they carry a different type of value than cash, gift cards and awards are still taxable fringe benefits—and, as such, they must be reported as part of your employees’ income. Unless these gifts come straight out of your pocket, consider them a fair source of income in your IRS report.

As a general rule, travel and commuting reimbursement does not count as taxable income. That being said, long-term commuting or refusal to relocate in order to diminish the distance does not qualify an employee for the aforementioned exemptions. If the assignment or job last longer than a year, you may need to factor reimbursement into the employee’s taxable income.

Outdated Payroll Systems

Outdated timekeeping and manual payroll processes can cause multiple different kinds of headaches, from inaccurate payments to noncompliance or other costly errors. In many instances, streamlining your data helps minimize human error.

Simply switching to an automated or enhanced payroll system will keep everyone—employees, managers, and the government—satisfied enough that they don’t come poking around your office. If you can’t foot the bill for a payroll system overhaul, you can always consider outsourcing. Abacus Payroll offers affordable services tailored to your specific needs to ensure that you and your employees receive only the best in payroll processing.

We understand how frustrating payroll management can be, and we’d like to help. For more information and a quote for our services, call Abacus Payroll at (856) 667-6225 today!

Easier, Friendlier Payroll Is In Your Reach

Small businesses are a big deal to us. Eliminate the hassle of over complicated payroll and HR processes by partnering with a local and responsive provider.

Focus on your business and leave the payroll and tax to us. Count on Abacus Payroll.