Transcript Tax Compliance Recovering Salary Overpayments

Office of Operations
2010 Fall Conference
Recovering Salary Overpayment –
Tax Compliance
Recovering Salary
Overpayments
Current Process
 Returned Check (AC230)
 Negative Additional Pay Earnings
(OVP)
 Retroactive Calculations
 Negative Time Entry Earnings
IRS Regulation
 IRS Publication 515:
Repayment of wages in the current
year that were originally overpaid in a
prior year can not reduce the tax
liability of the current year.
Issue
 OSC is currently underpaying and under
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reporting Federal, Social Security, Medicare,
State and Local taxes
New York State is at risk of sustaining a large
liability for back taxes, interest and penalties
Employees who are repaying overpayments
through OVP are underpaying taxes and could
be required to pay back taxes, interest and
penalties
Federal Withholding Tax
The IRS requires taxes to be withheld in the
year wages are received; the IRS does not
allow repayment of wages, previously
taxed in a prior year, to be considered in
the calculation of tax withholdings for the
current year.
The IRS may allow a current tax deduction
or credit for prior year wages that are
repaid
SS/Med Tax
The IRS uses the amount of wages and tax as
well as the year it was earned to determine
benefits.
All wages are considered earned in the year
they are paid – with the exception of wage
repayments
When overpayment of wages of a prior year
are repaid, IRS does acknowledge that they
were overtaxed in the prior year
But because the employee had the benefit of
the money in the prior year, they cannot
reduce the current year tax obligation
IRS Requirements
IRS requires that the W2 for the prior
year be corrected to reflect the
reduced SS/Med wages and
withholdings
The employer is required to return the
SS/Med taxes to the employee and
issue a credit letter
The IRS requires that the Employer’s
SS/Med Quarterly Filing for that year
be corrected
Tax Problem
As a result, OSC need to know the
year the original overpayment
occurred.
The year will determine if the
repayment can be considered in
calculating FWT and SS/Med Tax
Solution
 Different earn code for each year
 Set tax attributes of the earn code
that are appropriate for either a
current or prior year
More Specifics
 Create the following earn codes
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Q10
Q09
Q08
Q07
Q06
–
–
–
–
–
Overpayments 2010
Overpayments 2009
Overpayments 2008
Overpayments 2007
Overpayment 2006 and prior
Create Q11 for Jan. 2011
Only Q11 will update taxable earnings
Create Q12 for Jan. 2012
Change Q11 for Jan. 2011 to be a prior year
code
Transition
 Full Compliance Jan. 1, 2011
 OVPs that will be fully recovered by
2011 – no action
 OVPs for Terminated, Deceased,
Retired – update by OSC
 OVPs for Active, Leave or Paid Leave
– Updated by Agency
Converting Existing
Overpayments
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Convert only those overpayment records that will
not be satisfied in the final 2010 paycheck
A Control-D report will be provided to assist in
identifying those records to convert
Determine when the original overpayment
occurred based on check date
The overpayment may have occurred in a single
year or multiple years
End the original overpayment record using the
last day of the preceding pay period
Converting Single Year
Overpayments
 Create a new overpayment record
using the appropriate new
overpayment earnings code
 Begin the new overpayment record
using the first day of the pay period
 Transfer the Earnings, Goal Amount
and Goal Balance from the original
overpayment record
Converting Multiple Year
Overpayments
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Create new overpayment records using the
appropriate new overpayment earnings codes
Begin each new overpayment record using the
first day of the pay period
Determine the original overpayment amount for
each year
The Goal Amount on each new overpayment
record should reflect the overpayment amount
for the year corresponding to the record’s
overpayment earnings code
Converting Multiple Year
Overpayments (cont.)
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The Goal Balance of the original overpayment
record may be transferred to the Goal Balance of
a single new overpayment record or divided
between multiple new overpayment records
The employee receives the greatest benefit if the
total Goal Balance is transferred to the oldest
overpayment record
Caution: Do not apply a Goal Balance that is
more than the employee owes on that record
Converting Multiple Year
Overpayments (cont.)
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Determine the total Earnings amount to be
collected each pay period (usually 10%)
The Earnings amount may be applied to a single
new overpayment record or divided between
multiple new overpayment records
If the employee has an overpayment record for
the current year, collecting the total Earnings
amount from that record provides the employee
the greatest benefit
Converting Multiple Year
Overpayments (cont.)
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Once an overpayment record has been satisfied,
the Earnings amount must be transferred to
another overpayment record or records
A Control-D report will be provided to identify
employees with multiple unsatisfied overpayment
records
If an employee has an overpayment record for a
prior year and is then overpaid in the current
year, the employee receives the greatest benefit
if the current year overpayment is collected first
What Will Change
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Withholdings will change January 2011 – Q06
through Q10
Refunds of SS/Med only requested for Q07 – Q10
Form W2Cs Issued to employee/IRS
Credit Letter issued to employee
Refund will be paid to employee when received
from IRS
Employee may take a Federal Tax Deduction
Impact on Employee
 Q06 – Q10 – Net pay will decrease
 Q11 – Net pay will decrease January
2012
 Employees will get SS/Med refunds
for the taxes associated with the
amount recovered
 Employees will get a credit letter
Questions?