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I was overpaid on my recent paycheck by an amount that bumped me up to a higher tax bracket. My company wants me to pay them back the net overpayment but now my check is lower than it would have been should I have been taxed in my correct bracket? How should I proceed?

closed as off-topic by Jan Doggen, Lilienthal, gnat, mcknz, David K Feb 24 '16 at 18:48

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    Taxes can make the situation complicated, and different locales may have different rules. For instance, in Australia you would only need to repay the net overpayment that was left after taxes were taken out (presumably the employer gets the remainder back from the tax office). As for the extra amount that was withheld from your normal base pay, you probably can't get that back until your next tax return. – aroth Feb 24 '16 at 7:20
  • Possible duplicate of Previous employer overpaid me – Masked Man Feb 24 '16 at 7:28
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    Do you have the option of returning the full amount you were paid and getting a check for the correct amount in return? – Blrfl Feb 24 '16 at 11:10
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    If this question was posted on Personal Finance & Money it would need to include the country in the question and/or tags – mhoran_psprep Feb 24 '16 at 11:36
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    Voted to close. As-written the question is too open-ended which means that answers would have to handle potential legal issues as well, which is off-topic. – Lilienthal Feb 24 '16 at 12:56
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You could claim the excess tax paid as refund while filing the tax return. It is easiest to pay back by deducting the excess amount from the next month's salary since this means that your total annual salary is automatically corrected. If this cannot be done, you should obtain a suitable "receipt" from your company, which your tax department will accept.

Tax rules vary by location, but usually the entire income does not get taxed at the highest tax bracket rate. Instead only the income above the upper limit of next lower tax bracket gets taxed at that rate. To illustrate with an (oversimplified) example, consider the below tax brackets:

$0   - $100 ==> 10%
$100 - $500 ==> 20%
$500 -      ==> 30%

If you income is $400, then your tax is:

10% x $100 + 20% x ($400 - $100) = $70

If you were paid $600 in error, your tax becomes:

10% x $100 + 20% x ($500 - $100) + 30% x ($600 - $500) = $105

You could thus pay back $200 to the company, and claim a refund of $35 in your tax return. Unless the tax department pays you a substantial interest on the excess tax paid, you will still end up making some loss.

  • Actually, disregarding interest, any tax differences should by settled by the tax return - that, after all, is the point of filing one. In most countries, all your taxes for the year are calculated from scratch for the tax return, and compared to what you paid during the year - then you pay (or are refunded) the difference. – sleske Feb 24 '16 at 8:16
  • @sleske Right, although as some comments on this question show, a lot of people do not really understand tax returns. :-) – Masked Man Feb 24 '16 at 8:27
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Unless the amount is excessive (they paid $48,829.50 instead of $4,882.95) a reasonable company would inform you about the error, pay you less the next month, and your tax would be adjusted automatically. The only difference is if you had the excess payment in the last month of the tax year, where you would arrange with them to pay back the excess within that tax year.

Moving into another tax bracket will in most countries have very little effect on your taxes in most cases. The higher tax rate usually only applies to the amount in the higher tax bracket. And if you file a tax return, everything will be sorted out anyway.

  • "The higher tax rate usually only applies to the amount in the higher tax bracket" - While generally true in terms of the amount owed, for the purposes of withholding sometimes the employee's highest marginal tax rate is applied to their entire income. That can be a big hit if, for instance, the increase moved you from the 15% tax bracket to the 25% tax bracket. Yes you get it all back, but not until tax time. – aroth Feb 24 '16 at 10:04
  • @aroth I've never experience having taxes withheld at my highest marginal tax rate. Where were you that you experienced this? Seems like a big, interest free loan to the company doing the withholding. – Myles Feb 24 '16 at 14:02
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    @aroth: In that case the ones staying in the 15% bracket are overpaying as well. And the ones that are regularly in the 25% bracket. Everyone would be overpaying. If I was just $1 into the 25% bracket (with regular income) the company would be sending 10% of my gross income to the tax office for no reason at all. That would be an absolutely ridiculous way to run your payroll, and the employees will probably bring burning torches to the payroll office. – gnasher729 Feb 24 '16 at 14:11
  • @Myles - I was at a large (NASDAQ-listed) tech company in the mid/late 2000's. They used SAP to manage HR/payroll/withholding. And I don't think it was a current/up-to-date version of SAP, as trying to do anything in it was an exercise in frustration. The default withholding rate was the employee's highest marginal rate. It was possible to go into SAP and adjust your withholding (within certain limits), though I (and perhaps many others) never did because doing anything in the SAP system was so incredibly frustrating. Instead I just got massive tax refunds every year. – aroth Feb 24 '16 at 14:15

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