About Overpayments

• A wage overpayment occurs when a worker receives more wages than he actually earned during the pay period. If the overpayment occurred before the payroll department deducted taxes, it is a gross overpayment. If the payroll department deducted taxes from the overpayment before the worker received it, then it is a net overpayment. Overpayments may occur if an employee reports more hours than he worked, or if the payroll department miscalculates his earnings.
  
  

Employer Rights

• If you receive an overpayment, you must pay your employer back. If you still work for the employer who overpaid you, some states may allow him to deduct from your wages to recover the debt. However, most employers will inform you of the overpayment and give you a chance to repay the money yourself before they deduct from your wages. States that allow employers to deduct overpayments from an employee's wages typically limit the amount the employer can withhold each pay period.
  
  

Lawsuits

• If you refuse to repay your employer and you no longer work for him, or if your state doesn't allow involuntary wage deductions for overpayments, you employer may file a civil lawsuit against you. If he wins the lawsuit, the court will grant him a judgment that he can use to recover the debt. Depending on state law, your employer may use the judgment to garnish your wages, levy your bank account or seize personal property.
  
  

Tax Implications

• When you receive an overpayment, you must typically pay federal and state income taxes on it unless you repay it during the same tax year. If you repay the overage within the same tax year, the Internal Revenue Service will refund any tax that your employer withheld from the overpayment. However, if you repay the overage after the tax year is complete, you can't alter your W-2 or receive a refund on any withheld taxes, except those paid for Social Security.