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.
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
Naturally, 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.
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!