State Agencies Bulletin No. 1439

Subject
Processing 2015 Salary Refunds Received by OSC After January 4, 2016
Date Issued
November 18, 2015

Purpose

To inform agencies of the process for handling the late submission of Form AC230 (Report of Check Return For Refund Or Exchange) and the impact on the employee’s 2015 Form W-2 (Wage and Tax Statement) and agency appropriations.

Affected Employees

Employees who have a salary refund (AC230) submitted and processed after the January 4, 2016 deadline

Effective Date(s)

Immediately

Background

AC230s received by January 4, 2016 will be reflected in the employee’s 2015 Form W-2 and the agency appropriation will be refunded in full. Unfortunately, there are processing limitations for AC230s received after this date.

Impact on Employee Form - W2 Reporting

The IRS considers overpayments for 2015 that are returned in 2016 to be income in 2015 for reporting purposes because the employee had use of the funds (constructive receipt). As a result, when an AC230 is received after the January 4, 2016 deadline, the employee is due a corrected wage statement (Form W-2C). However, in most cases, the Federal, State and Local tax withholding balances for 2015 will not be reduced.

The exception to the constructive receipt rule is when the entire original check is returned. The IRS deems that constructive receipt has not occurred. Therefore, the employee should not have the income reported or subject to taxation.

Impact on Recovery of Taxes

OSC has a limited ability to recover taxes for salary refunds that were originally paid in a prior year. The IRS requires employers to apply a reasonable standard when requesting refunds for prior year taxes. OSC will only seek refunds of Federal, State and Local taxes for 2015 AC230s submitted with original checks and received by February 19, 2016.

OSC Actions

OSC is required to issue a “corrected” Form W-2 (Form W-2C) for 2015 if an AC230 is received after the January 4, 2016 deadline. If the original check is returned, all wages and taxes will be reduced on the Form W-2C.

If a personal or agency check is submitted with the AC230, Federal, State and Local wages and taxes will not be reduced. Only Social Security and Medicare wage taxes will be updated to reflect the return of the funds and a credit letter will be sent to the employee by OSC.

Agency Actions

Agencies must be diligent in their efforts to submit AC230s timely.

The Control D Report NPAY539 (Non-Negotiated Payroll Checks) as described in Payroll Bulletin 908 (Non-Negotiated and/or Undeliverable New York State Payroll Checks), was created as a tool for agencies to identify outstanding checks and take appropriate action.

Please refer to the table below to determine whether or not to include Federal, State and Local taxes on the Form AC230.

Check Type Include SS/Med Tax on AC-230 Include Federal Tax on AC-230 Include State 
Tax on 
AC-230
Include Local Tax on AC-230 Employee Receives a Corrected W-2 Employee Receives a Credit Letter the Following January
Original 2015 Pay Check            
OSC Receipt 1/5/16 - 2/19/16 YES YES YES YES YES NO
OSC Receipt On/After 2/20/16 YES NO* NO* NO* YES YES
Personal, Bank or Agency Check            
OSC Receipt 1/5/16 - 2/19/16 YES NO* NO* NO* YES YES
OSC Receipt On/After 2/20/16 YES NO* NO* NO* YES YES

* Taxes should be included in the check as gross wages, and employee will receive a corrected W-2 and/or Credit Letter.

Questions

Questions regarding AC-230s may be emailed to the Payroll Deductions mailbox.

Questions regarding Tax implications may be emailed to the Tax and Compliance mailbox.