Let’s face it. Sometimes despite careful calculations and approvals, payroll mishaps occur. That’s what a payroll adjustment is for! The important thing is to remedy it as soon as it is discovered. In our experience, here is the best way to handle them:
Employee Was Overpaid
The employee should refund the company immediately for the amount of the overpayment. If the amount is very large and the error was discovered much later (to where the employee already spent the money), an arrangement can be made for the employee to pay the company back in installments. It is not preferable, and in all honesty, you shouldn’t have to resort to this, but it is a solution nonetheless. Another option is to treat the overpayment as an employee advance. In this case, the company can deduct the amount from the employee’s future paycheck. At any rate, the employee should pay back the Net amount overpaid. Then the payroll company can refund any taxes overdrawn.
Employee Was Underpaid
The easiest way to handle this is to add the balance owed to the employee in the next payroll cycle. To do this, report the Gross Earnings amount owed to the payroll company as a second line item, separate from the employee’s regular earnings. Process your payroll as usual and think no more about it! Very simple!
You might consider writing an in-house manual check to the employee instead. A word of caution: Because it is out of the normal payroll cycle and you’ll have to consider taxes, this is not the preferred method, and you’ll need to handle this with care! If you do decide to go this route, keep in mind: The check amount should reflect the employee’s Net Earnings after taxes (not Gross Earnings). To get the amount right, contact your payroll provider and give them the Gross Amount owed to the employee. The payroll company will accurately calculate the tax liability and let you know exactly how much to make out the check. It’s so important to write the check for the Net amount! (If you write the check for the Gross amount, the payroll company will have to “gross up” the employee’s earnings in order to calculate the taxes correctly. This becomes a challenge to explain to the employee – most people do not understand the concept of taxes.) After obtaining the Net Earnings amount, instruct the payroll provider to capture the in-house check details for the next scheduled payroll so the taxes can be properly withheld at that time. Writing an in-house manual check is certainly a solution, but really should be a last resort option. It is much better to run it through the payroll company.
The McKelvey Group’s accounting consultants are generalists who can provide a myriad of support including HR- benefits-, vendor-, payroll-, and tax coordination. While we do not specialize in one particular area, we collaborate closely with payroll providers, tax accountants and benefits administrators to provide a strong administrative and financial team for our clients. Our accountants’ broad expertise is a perfect solution for the fast-growth company needing general finance and accounting support so its owners can focus on more important things… like growing their business!