Overpaid employees—guidance for future wage deductions

If you accidentally overpaid an employee and it’s too late to initiate a reversal, you may be able to correct the error by simply reducing (deducting) the employee’s gross wages on future payrolls. 

1. Check to see if you can still cancel or reverse the payment.
2. If it's too late to reverse the payroll, you can consider reducing their gross wages on an upcoming payroll.

In some cases, you may need to get money back for a non-taxable expense or reimbursement paid to an employee—to do so, set up a post-tax deduction for the employee on their next payroll. 

If you need further help, reach out to us through the Help section of your account.

Manually reduce wages on the next payroll, or the current one if it can still be adjusted

On the first page of a payroll run, you can manually adjust an employee's gross wages to adjust for any previously overpaid wages.

Important

Before you consider reducing wages on future payrolls, the amount you want to deduct must be a result of an accidental overpayment (e.g. a mathematical or clerical error), and there can’t be any dispute over whether the employee is actually owed those wages.

To reduce gross wages during the payroll run:

1. Head to the Payroll section and click Run Payroll.
2. Click Run Regular Payroll.
3. Adjust the total wages in the "Gross Pay" column by editing the hours worked in the "Regular hours" column. You may also be able to edit the gross pay directly—how to update wages is dependent on how an individual's compensation was set up.

Staying compliant

As with many laws affecting employees, if the state law is more restrictive than the federal law, the employer must follow the law that protects the employee’s rights.

• Federal law
  • Under federal law, employers can make paycheck deductions if there was an accidental overpayment because they consider those overpayments to be in the same category as wage advances. 
    • This also means that employers need not stay above the minimum wage when making deductions from future paychecks to correct previous overpayments.
• State law
  • Varies significantly by state. 
    • We urge you to check with your state’s employment agency to confirm that this type of wage deduction is allowed and if there are any relevant restrictions or guidelines

Considerations to make before deducting overpaid wages from subsequent paychecks:

• Consent from the employee 
  • Many states that allow employers to deduct overpaid wages from subsequent paychecks require employers to get the signed, written consent of the employee before making the deduction. Even if a state doesn’t explicitly require prior consent, there may be a notification process to inform the employee of the wage deduction. Because of this, we strongly recommend you have some sort of written agreement signed by your employee detailing the amount to be deducted and which paycheck(s) it will come from.
• Minimum wage considerations 
  • Some states require the employee’s take-home pay to be at least minimum wage. This means an employer can’t make a deduction that puts the  employee’s wages below the applicable minimum wage.
• Timing
  • Certain states put limits on the amount of time between when an employee was  overpaid and when the subsequent paycheck deduction can be made. Generally, employers should not deduct overpaid amounts from paychecks if 90 days have passed since the employee was overpaid.
• Amount
  • Some states limit the amount that can be deducted from the employee’s wages in case of an overpayment. This amount might be a set number or a percent of the employee’s normal wages that can be deducted. If the overpayment amount was particularly high and you can’t reverse the payment, it might be worth working out a separate arrangement with the employee to get the overpaid money back.
• Final paycheck
  • There are a number of states that prevent employers from deducting overpaid wages from an employee’s final paycheck.