How do I account for an overpayment of income by a former employer?

by Eric S. MacCollum, CPA | Feb 23, 2018

How do I account for an overpayment mistake by a former employer in 2016 of $10,000 on my 2017 tax return? The amount was repaid in 2017, and there is a letter of certification of it by the former employer.

When you are repaid wages that were taxed in a previous year, typically this is called a Claim of Right repayment. The way you handle it depends on the amount of your repayment. If the amount repaid is $3,000 or less, you can claim a deduction for the amount repaid.

In your situation, since the amount is over $3,000, you have the option of taking a credit for the repayment or taking a deduction for the amount repaid. While the explanation sounds simple, showing it properly on your tax return or getting tax software to do this is not so easy. The fact that you have proper documentation and a letter of certification from the former employer will definitely help should you ever get a notice.

For more resources, check out PICPA’s Money & Life Tips, Ask a CPA, or CPA Locator.

Answered by: Eric S. MacCollum, CPA, is a principal with Hudak and Company in Lemoyne, Pa.

The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
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