Knowledge Share by Brandie Odom, Payroll Consultant
Advances and Overpayments have always been a topic that confounds payroll professionals – especially when the transaction is for a prior year. Below is some advice and general information to help you identify the correct course of action.
When received, salary advances and overpayments must be included in the employee’s income for the payroll period. The tax treatment of repaid advances or overpayments depends on the type of tax involved and when the money is repaid.
If the employee repays the advance or overpayment in the year it was received, the adjustment can be made in the payroll system.
If the advance or overpayment is repaid the following year, a Prior Year Adjustment must be made to correct reportable wages and taxes. A W-2C — a corrected W-2 — must be issued to the employee and filed with the required jurisdictions affected. This process sounds simple and straightforward, but it is incredibly time-consuming. Because the corrections need to be made as quickly as possible, there is also a tight deadline. There are also amendment fees and other potential costs involved.
The first thing you should do is alert the employee that a W-2C will be sent to them. It is essential to do this as soon as possible, as employees will begin filing their taxes as soon as they receive their initial W-2.
Before you can start the correction process, there is research required and information to gather. There is also coordination that needs to occur for the entry of the adjustments depending on which payroll system your organization uses.
Things to note when making Prior Year Adjustments:
- Complete the adjustments in the correct order, Q1 -> Q4.
- Be sure the adjustment does not create negative wages.
- Depending on the payroll system your organization uses, Adjustments may not impact accruals or accumulators; After posting prior quarter or prior year reversals and adjustments, accumulators must be recalculated in these systems.
- There are many implications of handling Adjustments incorrectly. Adjustments should be made as timely and accurately as possible.
Both current and prior-year adjustments may be required in many situations outside of advances and overpayments. At PayTech, we have the experts to handle this complex process and ensure necessary Adjustments are handled quickly and accurately.
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We have the experts to handle this complex process and ensure necessary adjustments are handled quickly and accuately.