How do taxes factor in if an employer overlays an employee a substantial amount of money?

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How do taxes factor in if an employer overlays an employee a substantial amount of money?

My husband was overpaid by his current
employer – accounting error apparently – to the
tune of 52K gross. It makes sense that the
overpayment is paid back however, I’m trying
to understand the tax implications. Surely this
employer error put him into a higher tax
bracket. Furthermore, I do not see how my
husband can recoup income taxes. It doesn’t
seem so simple, just to have to pay back the
gross salary. Complicating it further, the
overpayment spanned 2015 and 2016, so a
completed tax year and an ongoing one. My
husband isn’t in a position to pay back this
amount of money through large paycheck
deductions, which would minimize tax to some
extent going forward. Can you help?

Asked on July 14, 2016 under Employment Labor Law, California

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 4 years ago | Contributor

Your husband will have to repay the gross amount. However, then that amount should not count towards his income, and so should not bump him into a higher tax bracket; and any withholding already taken out for him for will be credited vs. taxes due, resulting in lower end-of-year tax liability and/or a larger refund. Just make sure you provide records of everything to your tax preparer.


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