Mistakes happen when processing payroll. Fortunately, the Canada Revenue Agency offers clear instructions for correcting over payment issues efficiently. Just remember that there are different rules you need to follow depending on the reason for over payment.
The CRA divides reasons for overpayments into two categories: administrative errors and when employees don’t perform their duties.
When Employees Don’t Perform Their Duties
This type of overpayment happens in cases where an employee takes advance vacation credits but quits before actually earning the vacation time. This can also happen if you accidentally pay employees when they are on leaves of absences and already receiving disability payments. If you pay signing bonuses that are contingent with an employee staying with the company for a certain amount of time but the employee leaves early, this also constitutes an overpayment due to an employee not performing duties.
How to Report Overpayments When Duties are not Performed
In these cases, your employee should repay you the gross amount of the salary overpayment. This amount is the top line of the paycheque stub and consists of income before any deductions were taken into account. You should not make any changes to the employee’s T4 slip, and at tax time, your employee should report the overpayment along with the rest of the earnings.
Once the employee repays you, you should issue a letter detailing the amount of the repayment and the date, and in turn, your employee can use that information to claim a salary reduction on the personal income tax return. Unfortunately, as an employer, you can’t get a refund of the Canada Pension Plan contributions and employment insurance premiums you paid on the overpayment.
All other overpayments fall into the category of administrative errors. This can include anything from keying in the wrong number of hours on your payroll software to paying wages to the wrong employee. With this type of overpayment, you can adjust the T4 slip once the employee repays you. If the employee refuses to repay you or reneges on a promise to repay you, just leave the T4 slip as is; you also don’t change anything if you simply decide to let the employee keep the money.
Repayment During the Same Tax Year
If your employees repay you during the same tax year, they should pay the net amount of the overpayment. This is the salary overpayment minus any source deductions such as CPP and EI. The next time you remit payroll taxes to the CRA, you can adjust your payments accordingly. To explain it simply, if you’ve overpaid CPP and EI due to a salary overpayment, you end up paying less CPP and EI to the CRA the next time you do payroll taxes.
Repayment in Another Year
If your employee doesn’t repay until the next tax year or if you’ve already submitted all your payroll for the year, the employee should repay the gross amount of the overpayment. In these cases, you should amend the employee’s T4 slip from the year the overpayment occurred. To adjust the slip, subtract the repayment from the employment income in box 14, and adjust insurable earnings and pensionable earnings to match. Don’t change the CPP contributions or EI premiums.
If your employees deserve refunds for overpayment, the CRA rectifies that issue with the next tax return. As an employer, you can request to get your CPP and EI matching amounts back; just use Form PD 24, Application for a Refund of Over-deducted CPP Contributions or EI Premiums. Salary overpayments are almost inevitable when you have employees. They are relatively straightforward to deal with, but in some cases, these mistakes can be costly. As an employer, you may want to understand common payroll mistakes and how to avoid them.
In most cases, over payment problems can be resolved when you and your employee file your taxes. You should always include the over payment amount, along with Canada Pension Plan contributions and Employment Insurance deductions, on the employee’s T4 slip even if he or she doesn’t repay you. Should your employee repay you, though, give the person a letter saying he or she repaid you, and note the reason for the over payment.
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