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Recoup a Wage Overpayment - Worked Example

Author: Alice Gilman

An employee who receives an overpayment of wages is usually not entitled to keep it. The method an employer may use to recoup the overpayment depends on whether the recoupment occurs in the same or a different calendar year than the overpayment.

This Worked Example illustrates the payroll tax treatment of overpayments recouped in the same and a subsequent calendar year, as well as which tax returns must be filed by an employer to correct the overpayment.

Under the federal tax reform law enacted on December 22, 2017, the flat supplemental withholding rate decreased from 25% to 22%, effective for supplemental wages paid on or after January 1, 2018. Scenarios 1 and 3 provide examples in which the reduced rate of 22% is used. Scenario 2 provides an example in which the pre-2018 rate of 25% is used.