When a Postal Service employee is overpaid, the Postal Service establishes an account receivable for the overpayment and initiates the collection of the debt from the employee through the process described in either ELM 450, Collection of Postal Debts from Non-bargaining Unit Employees, or ELM 460, Collection of Postal Debts from Bargaining Unit Employees.
If the overpayment occurred in a prior year, the Postal Service bills the employee for the gross amount of the overpayment. The gross amount includes the net amount of the check/direct deposit plus all taxes withheld and other deductions. The Postal Service cannot recover federal, state, and local tax withholdings on behalf of the employee once the IRS Form W-2 is issued. Tax refunds due once the overpayment has been made are the responsibility of the IRS, state, and local taxing authorities.
If the overpayment occurred in the current year, the Postal Service initially bills the employee for the net value of the overpayment; thus, federal, state, local, and FICA/Medicare taxes are not part of the bill. However, if an employee has not fully repaid the overpayment by the end of the tax year (December 31, 2014), the Postal Service must report the unreturned value of the overpayment as taxable income on the employee’s Form W-2. This is because the employee received and had use of those funds during the year. Additionally, the employee and employer must now pay appropriate federal, state, local, and FICA/Medicare taxes on the remaining value of the debt. The Postal Service establishes an additional account receivable at the close of the tax year for the value of the taxes the employee owes related to the unpaid debt. The debt collection processes in ELM 450 and ELM 460 are used to collect the additional debt.
Wage Overpayment Indebtedness —Tax Treatment — Postal Bulletin 22402, 11-13-14