In California, Section 221 of the California Labor Code specifies that it is unlawful for an employer to collect or receive any part of wages already paid to an employee. The law, though, does allow for an employee to volunteer repayment of overpaid wages. The employee must agree to this via a written authorization.
IRS – Yes as long as your employer handles the filing of Your W2 and their Fed & California Payroll tax filings correctly
When an employee is overpaid, the amount in question is not only the amount that the employee receives but also the taxes and other percentage deductions paid by the employer and the employee. Factor in these amounts and remember not to reimburse your Employer for the gross overpayment. The employee should only repay the net that he received in his paycheck. The withheld portion must be recovered from the accounts where it was transferred. If a small business owner already paid his portion of income tax on the employee's earnings, the employer must deduct the overpaid tax during the next quarter. In some instances, wage overpayment during a past tax year requires an employer to file additional paperwork.
Recovery of Payroll Overpayment
Once the Payroll Department has calculated the amount of repayment, the employee will be notified of the amount due to Company. The employee can repay the debt by personal check, or directly through a payroll deduction (if actively employed) in accordance with the state regulations (see California above).
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 payroll docking, then the docking 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
Victor Santucci EA