Thank you for reaching out, jfarias123. Your options for handling the overpayment depend on whether the employee has returned the overpaid amount or not.
To begin with, if the employee hasn’t returned the overpayment by the end of Q4 2025, avoid modifying the payroll records for that quarter to maintain accurate tax filings. Instead, recover the amount in Q1 2026 by creating a deduction item to reclaim it from future paychecks.
However, if the employee repays the overpayment within the affected quarter, you can add a deduction item within the payroll for that quarter to ensure year-to-date (YTD) data and tax reporting remain accurate.
Here's how:
- Navigate to the Lists menu and select Payroll Item List.
- Click the Payroll Item button, then choose New.
- Tap Custom Setup and click Next.
- Choose Deduction and select Next.
- Enter the name of the payroll item that will be easily identifiable, then Next.
- In the Liability account field, enter the same expense account that was used for the original compensation that caused the overpayment. Select Next.
- Set the Tax Tracking Type to Compensation and hit Next.
- Choose how the deduction will be calculated.
- Click Next, then Finish.
For more information, refer to this article: Reduce paycheck wages for an employee who has been overpaid.
Feel free to leave a comment below if you have follow-up questions.
