Employer overpaid me in 2021 and part of 2022

[JimmyA]

I'm retired with a small monthly pension, and I began working part-time in Jan 2021.  A few days ago, my employer stated that they had incorrectly overpaid me $3.96 per hour more than they should have.  In 2021, I worked 712.25 hours and was overpaid $2,820.51.  For 2022, I worked 273.5 hours through the end of Feb, and I was overpaid $1,083.06.  My employer is setting up a plan for me to pay the overpaid funds, which I will pay off in 2022.  My concern is with the income I earned in 2021, that I will be paying back in 2022.

Question:  Had my employer paid me the correct amount in 2021, I would owe the IRS $413, instead of the $1,029 that I'll be paying this April.  This is a difference of $616.  There is also a difference of $261 in my California state income tax return.  Keep in mind that I also have a pension income in addition to my earned income.  The $2,820.51 that I owe my employer is less than $3,000 for "claim of right".  If I can add the 2022 overpayment of $1,083.06 to the overpayment of 2021, then I am over the $3,000, but I don't think that I am allowed to do that.  So, what recourse can I take when I file my 2022 income taxes?  I feel that I will be losing out on the $877 savings for federal and state incomes taxes, had my employer been paying me correctly.  Is it possible for my employer to issue a corrected W-2 for 2021 once I pay back the 2021 overpayment?  If so, am I allowed to file an amended return?

[ee-ea]

Your Claim off Right is $3,903.57, all that will be paid  back in 2022.

Any chance the boss would adjust the situation by giving you a pay raise in early 2022?

[JimmyA]

Thank you.  I don’t think my employer will go for rate increase 🙄

[bosso3]

Remember, you also paid FICA taxes on these overpayments from your employer.  Work with your employer to ensure these tax considerations are included in your repayment plan.

Generally, what happened in 2021 stays in 2021.  I doubt the employer can change your 2021 W2.

Likewise, what happens in 2022 stays in 2022.  It sounds to me like a reasonable approach may be to have your employer pay you ($3.96 per hour) less for the total number of hours you were overpaid.  This payment would reduce your 2022 taxes paid.  Of course, you want to ensure this pay reduction reverts to the correct amount when you have worked the total number of hours you were overpaid.

Alternately, since this was your employer's error, you may want to see if they are willing to negotiate a lower repayment dollar amount or number of hours, or simply forget the entire error and pay you at the rate you should have gotten from now on.

[JimmyA]

Thank you.  I work part time for a local government agency that does not deduct for SSA, however, I do pay for Medicare (HIT).  How do I go about requesting a refund?

[bosso3]

As I wrote previously, what happened in 2021 stays in 2021; same for 2022.  Thus, assuming the HIT amount withheld  in 2021 was accurately determined based upon your 2021 income, you have not basis for requesting a refund.  My comment about remembering the FICA withholding was intended to:

1) Remind you of the fact that FICA was withheld, and

2) Allow you to use this info in your negotiation with your employer on how to proceed in your repayment of the overpayment.

Lastly, the idea behind reducing your hourly rate for a time in 2022 is that between your 2021 actual payments and 2022 payments, everyone breaks even.  (Everyone includes you, your employer, and all taxes paid.) 

If you can negotiate a better deal for yourself you may make a bit more than if your employer had not made the error.

Good luck.