Should an employer seek a refund from the IRS of overwithheld income taxes due to a prior-year wage overpayment?

Author: Alice Gilman

It depends. If a wage overpayment is discovered in a year after that in which it was made, the employer may seek a refund from the IRS of the employee's overwithheld Social Security and Medicare taxes. The overwithheld income taxes cannot be refunded because the employee had use of that money in the year it was overpaid. However, if the employee pays the employer back for the amount of the overpayment, the employee may be able to deduct the repayment on his or her personal income tax return for that year.