Recovery of Payroll Overpayment
Recovery Method
Once the Payroll Department has calculated the amount of repayment to Loyola University Chicago (LUC), the employee will be sent an email detailing the amount due to LUC. The employee can repay the debt by ACH, Wire, personal check, or directly through a salary reduction (if actively employed) in accordance with the state regulations.
Recovery Amount
Current Calendar Year
If repayment is made in the same calendar year as the overpayment, the employee will repay the net pay amount of the overpayment. The Payroll Department will reduce the employee’s taxable wages and associated taxes for that calendar year to ensure the year-end W-2 Form is correct. If the repayment is made through salary reduction, then the reduction schedule may call for partial payments over multiple pay periods, but in no cases should the repayment occur over a longer period of time than the overpayment occurred. For example:
- Employee overpaid for one period, the employee's pay should be reduced by the amount of the overpayment in one pay period.
- Employee overpaid for four pay periods, the employee's pay should be reduced over four pay periods to recover the overpayment
Prior Calendar Year(s)
If repayment is not made in the same calendar year that the overpayment occurred, the employee must repay the net pay amount of the overpayment plus the associated federal and state taxes. (Taxes are permanently credited to the employee on December 31 and cannot be subsequently recovered by LUC).
The Payroll Department can only recover the overpaid Social Security and Medicare taxes. Since LUC can recover the Social Security and Medicare taxes, LUC will reduce the repayment amount by those associated taxes, if applicable. To this end, the employee must provide a written statement that he/she will not request a refund of Social Security and Medicare taxes as well from the IRS. This is to be done using the FICA Consent Letter Form.
According to the IRS, wages paid in error in the prior year remain taxable to the employee for that year because the employee received and had use of those funds during that calendar year. The employee is not entitled to file an amended tax return for that year. Instead, the employee is entitled to a deduction (or credit, depending upon the amount repaid) for the wages repaid on their personal income tax return in the year of repayment. The University recommends that they speak with a tax advisor regarding their personal tax situation.
Once repaid, the Payroll Department will issue a corrected W-2 Form, reducing only applicable Social Security and Medicare wages and taxes and issuing the employee a W-2c. The Payroll Department, if requested by the employee, can also issue a Statement of Corrected Income which details the amount repaid by the employee and the year repaid. The employee can use this Statement for their current tax return for a credit or a deduction. The employee should consult the IRS Publication 525 (Repayments) with respect to reporting the repayment of wages for a prior year. The University recommends that they speak with a tax advisor regarding their personal tax situation.
Recovery Method
Once the Payroll Department has calculated the amount of repayment to Loyola University Chicago (LUC), the employee will be sent an email detailing the amount due to LUC. The employee can repay the debt by ACH, Wire, personal check, or directly through a salary reduction (if actively employed) in accordance with the state regulations.
Recovery Amount
Current Calendar Year
If repayment is made in the same calendar year as the overpayment, the employee will repay the net pay amount of the overpayment. The Payroll Department will reduce the employee’s taxable wages and associated taxes for that calendar year to ensure the year-end W-2 Form is correct. If the repayment is made through salary reduction, then the reduction schedule may call for partial payments over multiple pay periods, but in no cases should the repayment occur over a longer period of time than the overpayment occurred. For example:
- Employee overpaid for one period, the employee's pay should be reduced by the amount of the overpayment in one pay period.
- Employee overpaid for four pay periods, the employee's pay should be reduced over four pay periods to recover the overpayment
Prior Calendar Year(s)
If repayment is not made in the same calendar year that the overpayment occurred, the employee must repay the net pay amount of the overpayment plus the associated federal and state taxes. (Taxes are permanently credited to the employee on December 31 and cannot be subsequently recovered by LUC).
The Payroll Department can only recover the overpaid Social Security and Medicare taxes. Since LUC can recover the Social Security and Medicare taxes, LUC will reduce the repayment amount by those associated taxes, if applicable. To this end, the employee must provide a written statement that he/she will not request a refund of Social Security and Medicare taxes as well from the IRS. This is to be done using the FICA Consent Letter Form.
According to the IRS, wages paid in error in the prior year remain taxable to the employee for that year because the employee received and had use of those funds during that calendar year. The employee is not entitled to file an amended tax return for that year. Instead, the employee is entitled to a deduction (or credit, depending upon the amount repaid) for the wages repaid on their personal income tax return in the year of repayment. The University recommends that they speak with a tax advisor regarding their personal tax situation.
Once repaid, the Payroll Department will issue a corrected W-2 Form, reducing only applicable Social Security and Medicare wages and taxes and issuing the employee a W-2c. The Payroll Department, if requested by the employee, can also issue a Statement of Corrected Income which details the amount repaid by the employee and the year repaid. The employee can use this Statement for their current tax return for a credit or a deduction. The employee should consult the IRS Publication 525 (Repayments) with respect to reporting the repayment of wages for a prior year. The University recommends that they speak with a tax advisor regarding their personal tax situation.