Negative paycheck due to overpayment

Hi RidgebackAmy,

It's important you're recording your expenses the right way in order to prevent errors in your books. QuickBooks Desktop offers an easy-to-use platform that makes it easy to manage your transactions. I'll be happy to steer you in the right direction so you can record the funds the right way and continue to manage your business with peace of mind. 

To ensure accuracy in your books, I highly recommend reaching out to an accounting professional to get more info on recording the funds. Doing this will help prevent any future discrepancies in your books. If you're not in contact with one, I encourage you to search for one on our website using this link here. I'll also leave this question open so other community members can share their advice on this. 

Feel free to ask other questions in the comments below. I'm here to help. 

Hello @ContractingA ,

I'm sorry to hear that you've been left in a "negative commission" situation.  I have a suggestion that will do what you need it to do but it is a long and drawn out process because of the limitations QBD places on some of their payroll items.  If they would allow us to use positive and negative signs in front of virtually every kind of payroll item, these types of problems could be solved easily.  But they are trying to protect us from ourselves so have restricted some payroll items to only go one way . . . positive or negative but not both.  Because of that, we have to create a lot of other items to accomplish our end goal. In this case, that goal is to reduce the amount of commission paid to this employee that will be reflected in the payroll expense account you use, and a reduction in CPP, EI & Tax expense and liability that you remit to CRA.  And this all needs to be reflected on the employee's T4 and ROE. And you also want to charge the net amount of this transaction to some type of loan receivable to the ex-employee.

This is not for the faint of heart . . . here we go!  :)

1.  Create an addition payroll item.  Call it something like Sales Commission Adjustment.  Enter the payroll expense account you want to use.  Make the earnings insurable, track tax to Box 42 - Employment Commissions, and enter checkmarks beside Federal Income Tax, CPP Company & CPP Employee, EI Company & CPP Employee, and WCB.  Select Neither on the Calculate based on quantity tab, and Finish on the Default rate and limit tab.

2.  Create three addition payroll items; ADJ CPP EE, ADJ EI EE & ADJ TAX EE.  Expense account should be the account you use in your G/L for payroll liabilities.  Uncheck insurable earnings, no tax tracking, no checkmarks beside any of the taxes in the list.  Select Neither on the Calculate based on quantity tab, select to calculate on net pay, then finish.

3.  Create a deduction payroll item called something like Employee Receivables, and link it to an other current asset account on your COA called something similar, Employee Receivables or whatever you deem appropriate.  When this is all done, this will be the only account you will have to deal with when attempting to collect the amount from your ex-employee.  If and when the ex-employee makes a payment, you will Credit this account and debit your bank account.

4.  Create an addition payroll item called something like Vacation ADJ.  This would be necessary if you accrued and paid vacation pay on the employee's final cheque.  My example below will include the vacation adjustment as well.

5.  Create an unscheduled payroll paycheque for this employee, making sure it is dated in the same period the employee was paid their final cheque.

6.  Pull up the employee's final paycheque.  In this example,  I paid John Doe $5000 gross commissions + $500 in accrued vacation pay + $288.46 vac pay accrued on the $5000 commission for a total of $5,788.46.

Final Pay Cheque:

7.  Create an unscheduled payroll and choose only the one employee, ensuring that you have chosen the same pay period as the final cheque was issued.  First, enter the amount of the commission the employee should have made on his final paycheque.  For example, let's say you are about to reduce/adjust that commission by $2000 + the amount of Vacation accrued on that $2,000 (where I am it would be $115.38).

What final pay cheque should have looked like:

8.  What these two steps do is allow you to make correct tax adjustments on your adjustment cheque.  Calculate the differences of all the taxes, both employee and employer, between the final cheque and the amounts that should have been deducted (above).

9.  Once you have all your amounts written down, delete everything from the Earnings section of the pay cheque.  Enter the commission difference using the payroll item you created in Step 1, in negative dollars.  In my example, it will be -$2,000.00.  You will note that no taxes calculate at all on this item.  This is because QBD does not allow entry of positive numbers to CPP, EI or Federal Income Tax on the Employee summary, thus the necessity for the items you created above.

10.  Enter the Adjustment CPP item you created on the second line of the Other Payroll Items and enter a positive difference that you figured out in Step 8 above.

11.  Enter the Adjustment EI item you created, and enter a positive difference that you figured out in Step 8 above.

12.  Enter the Adjustment Tax item you created and enter a positive difference that you figured out in Step 8 above.

13.  Enter the Vacation ADJ as a negative item for the amount of negative Vacation Accrued on the negative earnings.

14.  Enter a positive amount on the paycheque to the Employee Receivables item in the 'Other Payroll Items' section of the pay cheque.  The amount will be the net amount of the cheque, which will now bring the net amount of the cheque to $0.00, which is exactly what you want.

You would think we would be done at this point, but not quite yet.  Notice that there are no adjustments in the Company Summary portion of the paycheque.  Because there are no normal negative amounts posted to the CPP-Employee, EI-Employee and Federal Income Tax native items in the Earnings Summary, QBD will not allow you to make negative entries for the Company amounts in the Company Summary, as there is nothing in the Employee Summary to deduct from.

As there are two aspects to these adjustments, a) changes to the G/L accounts and b) changes to the tax items that populate the employee's T4, we now have to go and make some payroll liabilties adjustments.  For example, the only way to get an earnings item on an employee's T4 is to pay them an earnings item on a paycheque or through YTD entries.  This is why it was necessary to place a negative earnings item on this paycheque.  Although adjustment items for CPP, EI & Tax take care of the employee portion on the G/L for this negative commission amount, it does not take care of the employee portion that will show up on the T4 or the PD7A.  It also does not take care of the company portion on the G/L or the T4 & PD7a.  So we proceed to make some liability adjustments, some of which we will affect accounts, and some which won't because we've already posted to accounts through the adjustment pay cheque we've just created.

15.  Go to Employees-->Payroll Liabialities-->Adjust Payroll Liabiities.  First we'll account for the T4/PD7A amount of employee portion of CPP, EI and Tax.  Choose the same date as the adjustment cheque.  Adjustment is for Employee.  Enter Employee Name and Class if you use one.  Enter CPP - Employee payroll item, enter a negative for the adjustment amount for CPP.  Do the same for EI - Employee and Federal Income Tax.  Click on Accounts Affected and then choose Do not affect accounts.

16.  Go to Next Adjustment.  This adjustment is also for the Employee.  Enter CPP - Company payroll item, and enter a negative amount for the Company portion difference   Do the same for EI - Company payroll item. If you track WCB through the tax module, choose your WCB item and enter a negative difference there as well.  Click on Accounts Affected and then choose Affect liability and expense accounts. 

This is the resulting T4 (my fictitious employee only had the final cheque and the adjustment cheque for the entire year :)):

Note that everything is accounted for; the T4 shows the difference between the final cheque and the adjustment cheque in Boxes 14 and 42, and the Employee's portions for the differences of CPP, EI and Federal Tax are all accounted for.

The PD7A:

. . . and all is well.

If you are doing this retroactively, that is not a problem.  Still choose all the correct dates for your adjustment pay cheque and your Liability Adjustments to ensure everything is recorded in the right period.  Re-print your PD7A for that remittance period and mark it as revised.  In your current remittance period, print the PD7A and write the adjustment amounts next to each item on the PD7A, then subtract them from the current amounts, writing the result beside them.  The total of the results will be the amount you are paying this remittance which include the adjustments.

When you go to pay your Payroll Liabilities in QBD, include the adjustment period in your date range so all of the amounts will be picked up.  The resulting amounts in QBD will be the total payable which will include your negative adjustments, matching the adjusted amount you have also written on your PD7A.

Whew!  I told you it wouldn't be simple . . . these are the kind of hoops you have to jump through to do more complicated things in payroll in QBD.  Like I said, they could make it a lot simpler but they don't.  So it's just a matter of understanding how to set up the payroll items so you can know what effect they will have in every pertinent area of your QBD file, as well as messing around with the Adjust Payroll Liabilities.

I really hope it helps.  It sounds like a lot but if you follow all the steps you will get the desired results.

Cheers :)

I know this post was from a long time ago, but thought I would post an answer for other users that are looking for a solution.

I like what Rochelley posted, which is 100% correct.  But, I tend to cheat a little bit to make things easier which ends with the same result, but might not be what you'd like to do.  All depends.

I agree with Rochelley, create a deduction payroll item called something like Employee Receivables, and link it to an other current asset account on your COA called something similar, Employee Receivables or whatever you deem appropriate.  When this is all done, this will be the only account you will have to deal with when attempting to collect the amount from your ex-employee.  If and when the ex-employee makes a payment, you will Credit this account and debit your bank account.

Next, I would just go back to the paycheque where you originally paid out the commission.  Take note of the net amount paid.  Then reduce the commission amount to the amount he should have received. (If it was $5000 and should be reduced to $0, enter $0).  Then the taxes, CPP, EI, vacation accrued, WCB etc. should all calculate to the correct amounts.  (I say SHOULD because there are instances where you have to calculate the amounts manually.  If you manually adjusted any of these amounts on the original paycheque, then those manually entered amounts would remain the same...and would need to be adjusted manually again to the new correct amounts. Or, if the employee has maxed out their CPP, EI, WCB for the year on that paycheque, then you may have to manually adjust the amounts in that situation as well.)

Next, in order to bring the paycheque back up to the amount that actually came out of your bank account, go to the "Other Payroll Items" and use your new Employee Receivable payroll item and enter in the difference in what the net pay shows now, and what it was originally. Quickbooks will try and turn the amount into a negative amount, but a warning message comes up and select "yes" you want to make a POSITIVE deduction on the paycheque. The paycheque amount should now equal the same amount as the original paycheque.

Now, to ensure this change is captured in your next remittance, you may have to re-run a PD7A report for just that original pay period, and adjust your next remittance accordingly so it captures any amounts that have changed.

To invoice the employee for the amount owed, go to your Item List and create an "Other Charge" type item that is linked to that Employee Receivables account. Then create an invoice for that employee using that new item.  But as Rochelley suggested, you could also just do a journal entry when they pay you, to debit the bank account and credit the Employee Receivables account and skip the invoice altogether.  However, I do like the fact that you can email out the invoice to the employee, along with monthly statements showing how much they owe, and you are more likely to get what you are owed.  Good luck.

While theoretically the processes are correct, you should know that Labour Standards does not allow the employer to recover overpayments after the employee has left the business UNLESS it was stated in writing at the time of hiring.