We’re here for you. See what we’re building for small businesses at gusto.com/covid-19. To download W-2s or 1099s, sign into your account.
We’re here for small businesses. For W-2s or 1099s, sign in.

×

How can we help?

Deducting overpaid wages

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. 

Important: Before you consider this option, the amount you want to deduct must be as 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.

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

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. 

Payroll, benefits, HR and more.