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Overpayment Not Caused by You: Repayment Guidelines
We understand your concern regarding the payroll overpayment you received, especially if the error was not your fault. However, regardless of where the error originated (whether from your department, HR, or Payroll), any funds received that you were not legally entitled to must be repaid.
The University retains the legal right to request and recover any overpaid wages or salary. This repayment is required because the funds constitute an unearned distribution of University resources.
We will work with you to establish a repayment schedule
Overpayment when you are no Longer Employed by the University
The University adheres to a structured six-week protocol for the recovery of any salary or wage overpayment.
During this initial period, we will make multiple attempts to contact the employee via email and formal letter to notify them of the debt and establish a repayment plan.
If the following conditions are met:
- A period of eight weeks has passed (allowing sufficient time for all correspondence to be delivered).
- No payment has been made.
- No agreed-upon payment plan has been established to repay the overpaid amount in smaller installments.
The overpayment file will be formally referred to an external collection agency for continued recovery efforts. We encourage all employees to respond promptly to overpayment notifications to avoid this escalation.
Overpayment that Spans over More than One Calendar Year
The tax consequences of an overpayment repayment depend entirely on the calendar year in which the repayment occurs, as dictated by IRS regulations.
Repayment in the Same Calendar Year
If the overpayment is repaid in the same year it was issued:
- Repayment Amount: The employee only needs to repay the net amount of the overpayment (the amount received after taxes).
- Tax Recovery: Any federal and state taxes originally withheld on the overpaid amount can be recovered by the University and are automatically corrected in your end-of-year forms.
- Payroll Deductions: If repayment is handled via payroll deduction, these will be processed as pre-tax deductions.
Repayment in the Following Calendar Year
If the overpayment is repaid in the year following its issuance, the requirements change significantly:
- Repayment Amount: The employee is required to repay the gross amount of the original overpayment.
- Tax Withholding: By the start of the new year, the original withheld taxes were already remitted to the IRS and the State of Delaware. The University cannot recover these remitted income taxes.
- Payroll Deductions: If repayment is handled via payroll deduction, these must be processed as after-tax deductions.
IRS Regulations and Tax Deduction
The IRS views wages paid in error in a prior year as taxable income for that prior year because the employee received and had use of those funds.
- The employee is not entitled to file an amended return for the prior year to recover income tax on those wages.
- Instead, the employee is entitled to a tax deduction in the year the repayment is made.
FICA Tax Correction
Once the gross overpayment is fully repaid, the University will furnish the employee with a Form W-2c (Corrected Wage and Tax Statement).
- This correction will specifically reduce the "Social Security Wages" and "Social Security Tax Withheld" for the original year of overpayment.
- This W-2c can be used by the employee to request a refund of the overpaid FICA taxes.
Claiming the Deduction
The tax deduction available for the year of repayment is not automatic. To claim this deduction, the employee must consult a qualified tax professional for assistance in obtaining and completing the appropriate IRS tax forms. Payroll is not permitted to provide assistance in recovering these taxes.