Handling shortfalls in payroll
Address payroll shortfalls by understanding tax priorities and managing deductions effectively.
Overview
The term shortfall refers to a financial situation where a liability exceeds the required amount of available cash on a paycheck. In payroll, a shortfall will usually occur when there are not enough wages to cover taxes and/or other deductions. This is generally uncommon, but can occur more frequently for employees who are compensated heavily with cash tips.
Cash tips are a form of imputed income, which means they are included on the payroll for tax purposes, but are not included in the employee’s net pay because they have already been received by the employee.
Impact on taxes and deductions
Shortfalls can result in an employee’s taxes and deductions being partially collected or not collected at all from the employee’s pay. Government agencies may provide guidance on whether there tax should take precedence if a shortfall results, but employers must ultimately determine the best order of priority based on their understanding of the agencies' guidance. Typically, consideration for net pay priorities are as follows (in order of priority):
- Taxes
- Child support and/or federal levies (if the federal levy was issued prior to the employee opting into any payroll deductions*)
- Section 125 cafeteria plan deductions
- Retirement plans
- FSA, FSA dependent care, HSA
- Post-tax elective deductions
*Note: Any garnishment issued by the state or court will need additional consideration depending on the ruling illustrated on the notice or state that issued the garnishment. Careful review of all garnishments should be performed. If needed, reach out directly to the garnishing agency for more information.
Handling shortfalls in Check API
Check handles shortfalls differently for taxes and post-tax benefits and deductions, and pre-tax benefits.
For taxes and post-tax benefits and deductions, if a shortfall results in one or more of these items being partially or fully skipped, a warning will surface in the “warnings” item on the Payroll API. For example:
// Payroll API
{
...
"warnings": [
{
"code": "partially_applied",
"reason": "negative_net_pay",
"deduction_type": "tax",
"deduction": "tax_8L3JLfsH4X6dp0maBWfW",
"actual_deduction_amount": "15.19",
"expected_deduction_amount": "92.80"
},
{
"code": "skipped",
"reason": "negative_net_pay",
"deduction_type": "tax",
"deduction": "tax_SrfTqaLr3gsnk0Vy79Ri",
"actual_deduction_amount": "0.00",
"expected_deduction_amount": "2.49"
},
{
"code": "skipped",
"reason": "negative_net_pay",
"deduction_type": "tax",
"deduction": "tax_c5zV1VDOJ66JIUiIcxyy",
"actual_deduction_amount": "0.00",
"expected_deduction_amount": "0.58"
}
...
}However, if a pre-tax deduction cannot be fully funded, Check will block the approval of the payroll by default by surfacing a negative_net_pay error. For example:
{
"error": {
"type": "net_pay_negative",
"message": "One or more negative net pay errors occurred during handling of payroll pay_ExNo7Vnq7uiV7qNmw4vz:\nFull pre-tax retirement benefit (401k) amount cannot be withheld. Affected Employee ID: emp_WPdZfmDSKuVYegwhxKKp;"
}
}In this situation, partners should review the payroll with the company and reach out to Check if dropping any necessary pre-tax benefit is desired.
This is because, while not common, employers may be negatively impacted by an audit by their benefit or retirement provider, or may be assess penalties and interest for mishandling an employee’s payroll, if they cutback an employee’s pre-tax benefit without the employee’s discretion.
General considerations
In general, we recommend surfacing the warnings to employers within your product when our API returns indication of a shortfall scenario. This can be done by surfacing the contents of the `warnings` field on the payroll API object.
Once an employer is made aware by their payroll provider of what shortfalls have occurred, they can:
- Reallocate allowable taxes or deductions: If there is still some net pay coming to the employee before finalizing the payroll, the employer should contact you to discuss how to reallocate the net pay to satisfy as many taxes and deductions as possible resulting in a zero net pay.
- Communicate shortfall amounts: If there are still some taxes and deductions that have not been funded after the reallocation and the net pay is zero, the employer should make the employee aware every pay period that a shortfall occurs. This communication with employees should be done in writing and accompany the employee’s affected pay stub.
Last updated on March 31, 2024