Negative Earnings
Correct payroll errors efficiently by utilizing negative earnings adjustments to ensure accurate employee payments.
What are negative earnings?
Occasionally, situations may arise where an employee’s earnings are overstated or requires an adjustment. Negative earnings offer a convenient way to make these corrections without the necessity of voiding and reissuing the entire paycheck. By entering negative hours or amounts on the current paycheck, any previously overstated earnings can be rectified efficiently. This flexibility allows for accurate adjustments to be made in a straightforward manner.
When should it be used?
The entry of negative earnings is typically used when an employee is overpaid or receives an incorrect amount of pay. It can also be utilized to address discrepancies with work hours or incorrect pay codes. This eliminates the need to enter miscellaneous deductions to recover overpaid funds. It's a convenient way to handle such issues, however it must only be used if the employee has sufficient wages to cover the negative amounts and has been alerted to the adjustment.
The ability to allow a negative earning does three things:
- It still captures the actual hours worked in the period. That employee worked 10 hours in the period and if ever audited, it will be important to reflect the true hours worked.
- Makes for a transparent explanation to the Employee - Instead of “we’re not going to pay you 5 overtime hours for the overpayment last week.” The conversation can be “We’re going to correct the overpayment last pay period. You’ll see the additional hours paid removed on your paystub.”
- It allows the employer to correct a mistake without the need for a void. As we can see in the updated Year to Date totals, the taxable income for the year is accurately reflecting the wages this EE should be taxed on.
How should it be used?
Each situation requiring the input of negative earnings should be evaluated on an individual basis to ensure it aligns with the following criteria:
- The employee must receive a forthcoming paycheck with sufficient earnings to accommodate the negative adjustment.
- A negative (-) value must be entered using the same earning code that was previously overstated.
- The adjustment must not lead to negative net pay, this will result in an error and block payroll processing.
- Check recommends that adjustments are made within the same quarter and must not extend into a different calendar year.
- Employees should be informed about the adjustment; it is recommended to document the rationale behind the adjustment.
Below are common instances demonstrating how negative earnings can be used.
Scenario 1:
An employee is paid 40 hours regular and 10 hours overtime, but should have only received 5 hours overtime. In this case, negative earnings can be used on the very next pay period to correct the previous period, and accurately reflect the true year-to-date.
By recording -5 overtime hours on the following pay period, the employer will reduce the overpaid wages and ensure an accurate representation of year-to-date wages.
What does this look like?
For this example, this represents their 2nd check with the company in the same amount. The totals from their previous check are combined and visible in the Year to Date column.
09/01/2023 | Year to Date |
Regular Hours - 40 (400.00) | 800.00 |
Overtime Hours - 10 (150.00) | 300.00 |
Gross = 50 (550.00) | 1100.00 |
TAXABLE INCOME = 550.00 | 1100.00 |
Federal = 20.00 | 40.00 |
SS = 34.10 | 68.20 |
Medicare = 7.97 | 15.94 |
Net Pay = 487.93 | 975.86 |
The employer realizes that this employee should have only received 5 hours of overtime in the previous pay period, the following check reflects the adjustment.
It would look as follows and be recorded on the following check.
09/08/2023 | Year To Date |
Regular Hours = 40 (400.00) | 1200.00 |
Overtime Hours = 10 (150.00) | 375.00 |
Overtime Hours = (-5) (-75.00) | (Included in the total above) |
Gross = 45 (475.00) | 1575.00 |
TAXABLE INCOME = 475.00 | 1575.00 |
Federal = 18.00 | 58.00 |
SS = 29.45 | 97.65 |
Medicare = 6.88 | 22.82 |
Net Pay = 420.67 | 1396.53 |
Scenario 2:
An employee was paid 8 hours sick but should have instead been paid 8 hours vacation. In this scenario, entering -8 sick hours and adding 8 vacation hours will correct the employee’s wage allocation.
09/01/2023 | Year to Date |
Regular Hours = 32 (320.00) | 720.00 |
Sick Hours = 8 (80.00) | 80.00 |
Gross = 40 (400.00) | 800.00 |
TAXABLE INCOME = 400.00 | 800.00 |
Federal = 20.00 | 40.00 |
SS = 24.80 | 49.60 |
Medicare = 5.8 | 11.60 |
Net Pay = 349.40 | 698.80 |
The employer realizes that this employee should have received 8 hours of vacation instead of sick in the previous pay period, the following check reflects the adjustment.
It would look as follows and be recorded on the following check.
09/08/2023 | Year To Date |
Regular Hours = 40 (400.00) | 1120.00 |
Vacation Hours = 8 (80.00) | 80.00 |
Sick Hours = (-8) (-80.00) | -80.00 |
Gross = 40 (400.00) | 1200.00 |
TAXABLE INCOME = 400.00 | 1200.00 |
Federal = 20.00 | 60.00 |
SS = 24.80 | 74.40 |
Medicare = 5.80 | 17.40 |
Net Pay = 349.40 | 1048.20 |
Entering Negative Adjustment in Payroll
In payroll entry, users can input a negative value by using a minus sign in the hours or amount field for the appropriate earning code. This will reduce the hours and amount as applicable. If the adjustment results in a negative total wage amount, the system will generate an error message. To resolve this error, the employee’s wages must be adjusted to ensure a positive total wage amount.
When should negative earnings not be used?
- Voids Negative earnings should never be used to void an entire paycheck. A void is still necessary in cases where an employee’s wages, taxes and net pay are impacted or should be voided and reissued.
- Reduce Earnings that were never paid - This means If an employee was never paid for a specific earning, inputting a negative entry should not be made for this earning. For example, if a Bonus was never issued, there should never be -1000.00 negative earning Bonus adjustment.
- Reduce Earnings in Prior Year Negative entries should never be used to modify earnings in a prior year as annual returns and employee W2s have already been filed.
- Negative Net Pay A negative earning adjustment should never be entered if it leads to negative net pay or the negative earning outweighs the positive earnings in the quarter.
When is a Zendesk ticket still required?
Negative Earnings will not solve every situation, so it’s important to reach out to Check if any of the following situations are true.
- Employee no longer works for the company and was overpaid. Check can work with you to ensure the correct wages are recorded for the employee and ensure an accurate W-2.
- The negative earnings are substantially larger than the next few payments. Simply put, negative earnings are most effective when they are offsetting larger payments.
- Example: The employee was paid 400 hours, but should have been paid 40 hours. It would be best to void and reissue the payment correctly instead of offsetting the next 10 payments of 40 hours each.
Special Considerations
Particular attention should be directed towards the following compliance matters, as each state may have distinct laws and regulations governing each of these items. Check strongly advises partners and employers to conduct a comprehensive review of labor law regulations prior to implementing any negative earning adjustments:
- Minimum Wage - Employers must verify that negative earning adjustments do not result in employees’ wages falling below the minimum wage threshold. Additionally, it is important to consider the potential impact on employees who have child support and garnishment obligations.
- Weighted OT Impact - Negative earnings can lead to a decrease in total worked hours and wages for the pay period, which could affect the calculation of weighted overtime hourly rate. It is crucial to carefully monitor such situations to ensure that the employer stays compliant with state regulations.
- Record Keeping - When entering negative earnings, it is crucial for the employer to maintain accurate documentation detailing the reasons behind these adjustments and inform the employee prior to making the adjustment. This practice ensures accurate tracking and record keeping, which can be invaluable in the event of an audit or if employees raise concerns of being underpaid.
Overall, negative earnings can serve as a valuable resource for resolving errors, addressing overpayments, and enhancing payroll efficiency. Check strongly encourages each use case to be assessed carefully to ensure compliance with state specific labor laws.
Recording
Last updated on March 31, 2024