Definition of Payroll Reversal

A payroll reversal is a process that involves asking the employee’s bank to refund an incorrect payroll direct deposit or check.

What is a payroll reversal?

A payroll reversal is a process of sending a request to a receiving bank to reverse the original deposit transaction. Typically this process is a banking remediation in response to a customer request. Said differently, it is pulling back funds from an employee that were sent via direct deposit through payroll when they shouldn’t have originally been sent.

Common examples of when to use a payroll reversal include:

• Crediting an employee with the wrong payment amount
• Sending money to the wrong bank account
• Transferring a duplicate payment
• Voiding incorrectly filled checks

Why does payroll reversal matter to your business?

Sometimes, you must use a reversal to ensure the books are balanced. Improperly adjusting payroll without noting a payroll reversal can create multiple cash flow and taxation issues.

What is the payroll reversal process?

In most cases, a reversal transaction is simple. If you use payroll software, you should have the option for a payment reversal in the item’s journal entry. Depending on your chosen program, you may have multiple options for resolving the error. For example, if you need to adjust an overpayment, you may be able to deduct the excess amount from the employee’s next paycheck.

In the case of a worker refund, you would want to ensure that future payroll funds are not affected and may want to void the payment instead.

How long does a reversal transaction take?

Generally, a worker’s bank account has up to five days to reverse the transaction once they receive your notice. However, keep in mind that in most cases, you also have five days to request the reversal from the moment the direct deposit is sent.

If you are in a restricted state such as New York or California, you need to notify the employee, and the state may require employee consent. Therefore, be sure you are familiar with the laws in the states where you do business.

Other similar terms to payroll reversal that can assist you

• Pay Periods – The frequency in which an employee receives their wages.
• Payroll Journal Report – A summary of transactions regarding employee pay.
• Professional Employer Organization (PEO) – A PEO is an external company that takes on the majority of the HR-related back-office functions that can sneak up on a busy business owner.

Summary of the definition of payroll reversal

There are times when you will need to process a payroll reversal to recoup funds that were inaccurately deposited in an employee’s bank account. Although federal law doesn’t specifically address this process, some states, such as California and New York, have regulations around how payroll reversals are to be handled.

Similar glossary definitions you must know

• Payroll Taxes – The money deducted from an employee’s wages to satisfy government taxes, Social Security, Medicare, and unemployment requirements.
• Reverse Wire – When a company pulls a wire payment from another organization via wire transfer.

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