What to Do if You Overpaid Your Employee Wages Using Payroll Software

Filip Dimkovski - TBR writer
By Filip Dimkovski
Michelle Meyer - Editor for TBR
Edited by Michelle Meyer

Published October 5, 2022.

Man sitting at a desk in front of a laptop, holding a pen and looking at bank notes and coins lying on the desk

Managing a business's payroll can be difficult—even if you're using payroll software to handle the hard work for you. Some automated solutions offer a lot of payroll software features, but despite that, mistakes can happen. Regarding payroll management, one of the most common mistakes is overpaying.

Overpaying happens when the employer incorrectly calculates the amount they're supposed to pay the employee. In the majority of cases, this is due to improperly calculating the number of hours worked or omitting deductions. This is exactly why many companies do their best to manage and track workers' compensation. A simple and unintentional problem like this could lead to legal issues for your business.

» Suspect overpayments are because of other reasons? Implement internal checks to prevent fraud and employee misclassification

Contact the Employee Immediately

The first and most important step after overpaying is to contact the employee immediately. This way, you can explain the situation and ask the employee when they can return the money. In some cases, employees may not have the funds available immediately and may need a few days or weeks to repay the debt. Regardless of the circumstances, it's important to be understanding and work out a repayment plan that works for both sides.

If the overpayment happened because of an error on the employer's part, it's necessary to apologize for the mistake. Usually, employees will be understanding and will work with you to repay the amount. However, if you don't handle the situation properly, it could lead to resentment from the employee's side and even legal action. Therefore, make sure to share the details with the employee and keep them informed until the problem is resolved.

» How do you avoid overpayments in the future? Ensure you understand the difference between employee compensation and benefits

How to Correct an Overpayment

After you've contacted the employee and agreed on a repayment plan, it's time to take care of the overpayment itself. Essentially, this process will depend on your payroll software. Usually, the easiest thing to do is to void the original check and generate a new one with the corrected amount. If you're unable to void the transaction, consider the following options.

Employee Makes a Repayment

When voiding the transaction isn't possible, getting the employee to simply repay the overpaid amount is the simplest solution. Even though handling the payment this way is simple, remember to be cautious. If the employee repays you in cash, be sure to get a receipt that includes the date, amount, and purpose of the repayment. This way, you'll have a record of the repayment and can avoid any future issues.

Payroll Deduction

Even though getting the employee to repay is the simplest option, it might not always be possible. So, your next best choice would be payroll deduction. If you choose to deduct the overpayment from the employee's wage, you'll need to update the amount of the deduction in your payroll software.

It's important to note that you can only deduct the overpayment if the employee agrees to the deduction in writing. While this can be a disadvantage of this method, it also means you will have a paper trail to refer to if necessary. Payroll software will make the process much easier for you, as it will make the necessary adjustments automatically by calculating the deductions for you.

Confirm State Law Procedures

An important practice many employers neglect when it comes to overpayment is getting legal advice. It's highly recommended to check your state's laws on wage overpayments before taking any steps, or even consult a professional to handle the matter for you. In some states, there are specific procedures that must be followed when an employer overpays an employee.

For example, in California, employers are required to notify employees of the overpayment in writing and give the employees at least two weeks to repay the debt. If the employees don't repay the debt, the employers can deduct the money from future wages. Normally, details like the deduction limit differ from jurisdiction to jurisdiction, as you won't be able to make deductions below the minimum wage. So, make sure to research your local laws before taking any action, as some actions on the employer's part could negatively affect the employee.

» Considering branching out your business? Outsource to a PEO to ensure payroll compliance in each location


Overpaying an employee can be a stressful situation for both the employer and the employee. However, by using payroll software to handle the hard work for you, the issue can be resolved quickly and efficiently. This is one of the main benefits of manual vs automated payroll. In addition to helping you manage wage overpayments, a reliable payroll software solution will also prevent similar mistakes from happening again.

» Want to invest in payroll software? Read TBR's payroll software reviews

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