Tax Implications for Overpayments to Employees

If you overpay an employee the PAYG withholding you have paid on the amount to the ATO can complicate the issue. There are a number of different avenues to take depending on the situation. Firstly, you need to decide if the employee should pay back the amount or if you will forgive the debt.


Employees Debt is Written Off

If you choose to write off the employees debt on the overpaid amount it’s called a Debt Wage Fringe Benefit. This means you are required to pay Fringe Benefits Tax on the overpaid amount.


Employee Re-pays Debt

If you decide the employee must repay the debt there are a range of ways you need to resolve the situation. What you do is dependent on whether you identified the overpayment in the same financial year or one following.

Same Financial Year

If the overpayment is discovered in the same financial year then the employee will need to pay you the total overpaid amount minus what you withheld for PAYG from their after tax income. For example, if the employee was overpaid by $1000 and $200 of that was withheld the employee will owe you $800. If you make an agreement with an employee so they don’t need to pay the full amount until the next financial year Fringe Benefits Tax may apply to you for the outstanding amount.

Later year

If the over-payment is identified in  a later year the employee is required to pay the entire amount including the amount withheld by you (as they will have already received a tax return).


Reporting an Overpaid Amount

For an overpaid amount identified in the same year, you should issue your employee with a PAYG summary with the correct amount, not the overpaid amount (even if they haven’t paid the full amount back).

If you have already reported and paid the incorrect amount you will need to lodge a revised activity statement.

For more information see the ATO website or ask your accountant.



The information in this document reflects our understanding of existing legislation, proposed legislation, rulings etc as at the date of issue. In some cases the information has been provided to us by third parties. While it is believed the information is accurate and reliable, this is not guaranteed in any way. Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information.