Once the employee has already received the money, you should not take any action in the system until the money is returned. This is for two reasons:
- The money is gone and needs to be accounted for
- The employee received the money. Until, and unless, the employee pays that money back, this pay needs to be included in the employee's W2.
When the employee repays the money, adjustments should be made to the next available payroll that are the exact opposite of the pay the employee received (e.g. If the employee was paid on an assignment for $1000, they should be 'paid' on the exact same assignment for -$1000). All Addons, Contributions, and Deductions should be treated the same. Also, the employee's Tax and Retirement setting should exactly match the setting used when the employee was first paid. If this is done quickly, it will be easier because there is less chance the of setup changes.
By following this process, you improve the chances of the reversing action being identical (but opposite) of the original payment. However, if there is other pay involved, it is possible the tax effect will not be exact. Also, you could see some penny differences, due to rounding, in some situations. When these things happen, you may wish to make additional manual adjustments. For taxes, don't forget they are essentially an estimate and the employee may settle differences with the IRS when filing a tax return.