Net Pay Shortfalls occur in R365 Payroll when an employee's earnings are insufficient to cover all required tax withholdings, deductions, and garnishments — resulting in a $0.00 paycheck and potential carryover of unpaid deduction balances. Use this article to understand how shortfalls are handled, configure deductions for carryover, and locate carryover balances in the system.
Prerequisites
Before working with Net Pay Shortfalls, confirm the following:
Net Pay Shortfalls must be enabled for your organization. This feature is controlled at the payroll engine level and is enabled by R365 implementation or engineering during payroll company setup — there is no in-app toggle for customers. If you are unsure whether Net Pay Shortfalls is active for your company, contact R365 Support.
Deductions must be set up on Employee Records before carryover behavior can be configured. See Employee Records — Payroll Tab for setup steps.
Previously Paid Earnings are amounts already paid to an employee outside the current payroll run — most commonly tips paid in cash or through a POS system. Employees with high tip income are most likely to experience net pay shortfalls.
Editing the 'Carry over unpaid balances' setting on a deduction requires a role with permission to edit employee pay data — such as HR Admin, Payroll Admin, or Payroll Specialist. View-only roles cannot make this change.
Overview
Net Pay Shortfalls occur when an employee's net pay is insufficient to cover all required tax withholdings, deductions, and garnishments. This most commonly affects employees who receive Previously Paid Earnings — such as cash tips — and have already received the majority of their gross pay. When this occurs, their remaining hourly earnings do not cover the associated taxes and deductions, and a Net Pay Shortfall results in a $0.00 paycheck.
Withholding shortfalls are handled differently depending on type:
Shortfall Type | Carried Over? | How It's Handled |
|---|---|---|
Deduction Withholding Shortfalls | Yes — if 'Carry over unpaid balances' is enabled | Carried to the next paycheck. If that paycheck also results in a shortfall, carryover continues until resolved by earnings or manually cleared. |
Tax Withholding Shortfalls | No | Recorded on paystubs as Uncollected Taxes and Carryover Balances for reporting. R365 automatically resets tax shortfall balances to zero at calendar year-end. Any under-withheld taxes are reflected on the employee's annual tax forms and may result in the employee owing taxes when filing their return. |
Payroll Journal Entries post only actual withholdings and do not include Carryover Balances. To view all outstanding deduction Carryover Balances, navigate to Reports → Workforce Reports → Payments → Negative Balances.
Configuring Deductions for Carryover
Only deductions with the 'Carry over unpaid balances' setting enabled will be carried over when a Net Pay Shortfall occurs. If an employee does not have enough net earnings to cover a deduction that does not have this setting enabled, the deduction will not be collected and the employee will be flagged as 'Unpayable'.
Unpayable employees: When a deduction without 'Carry over unpaid balances' cannot be collected due to insufficient net pay, the employee is marked 'Unpayable'. The payment shows a red error icon on the Pay Run Details page and the pay run moves to Needs Attention — payroll does not silently proceed. The pay run remains in Needs Attention until you resolve or remove the affected payment. To prevent this, enable 'Carry over unpaid balances' on the deduction, or review the employee's earnings to ensure sufficient net pay.
The 'Carry over unpaid balances' setting is located in the deduction settings found on the Payroll tab of Employee Records.
Persistent shortfalls: Deduction carryover balances have no automatic cap and will accumulate until resolved. There is currently no self-service option to edit or reset a carryover balance directly. To manage persistent shortfalls:
Use the Negative Balances report (Reports → Workforce Reports → Payments → Negative Balances) to identify affected employees and amounts.
On the employee's deduction, uncheck 'Carry over unpaid balances' if future shortfalls should error instead of accruing, or adjust the deduction's amount or expiration date.
To forgive or reset an existing carryover balance, contact R365 Support — this cannot be done through the current UI.
Order of Operations
When a Net Pay Shortfall occurs, R365 processes withholdings in a defined order — collecting as much as possible from available earnings and carrying over any remaining balances. Understanding this order helps explain which withholdings are collected first and which may be deferred or dropped.
Only deductions with the 'Carry over unpaid balances' setting will be carried over. Taxes will not carry over unpaid balances. See Configuring Deductions for Carryover above.
Worked Example
The following example shows how R365 processes withholdings for an employee with $50 in Standard Earnings (hourly wages) and $200 in Previously Paid Earnings (cash tips already received), with $70 in total calculated taxes.
Phase 1 — Split withholdings proportionally:
Standard Earnings share: $50 ÷ $250 = 20% → $14 allocated to Standard Earnings taxes
Previously Paid Earnings share: $200 ÷ $250 = 80% → $56 allocated to PPE taxes
Phase 2 — Withhold from Standard Earnings:
$14 in taxes is withheld from the $50 in wages (Social Security → Medicare → Federal → State → Local).
No shortfall at this stage — $50 covers the $14 allocation.
Phase 3 — Withhold from Previously Paid Earnings:
The system attempts to withhold the $56 PPE tax allocation in priority order.
Net Earnings after all withholdings = $250 – $70 = $180.
Net Distribution = $180 – $200 (PPE already paid) = –$20 → Net Pay Shortfall.
R365 reduces the lowest-priority PPE withholdings (Local → State → Federal income taxes) until the distribution reaches $0.00. The employee's paycheck is $0 rather than negative.
Result: The uncollected tax amounts ($20 worth) are recorded as Uncollected Taxes on the paystub, appear in Carryover Balances for reporting, and are reset at year-end. They are not re-withheld on future paychecks.
Phase 1 — Calculate withholdings for Gross Earnings
All withholdings are first calculated against total Gross Earnings, then proportioned across Standard Earnings and Previously Paid Earnings:
Gross Withholdings based on Gross Earnings are calculated.
Total Withholdings are calculated as (Gross Earnings + Previous Carryover).
Standard Earnings Withholdings for taxes are calculated as:
(Total Withholdings × (Standard Earnings ÷ Gross Earnings))Previously Paid Earnings Withholdings for taxes are calculated as:
(Total Withholdings × (Previously Paid Earnings ÷ Gross Earnings))
Phase 2 — Withhold from Standard Earnings
Standard Earnings Withholdings are collected in the following priority order:
Social Security Tax
Medicare Tax
Federal Income Taxes
State Income Taxes
Local Income Taxes
Phase 3 — Withhold from Previously Paid Earnings
Previously Paid Earnings Withholdings are collected in the following priority order:
Social Security Tax
Medicare Tax
Garnishments (in the order they appear on the employee record)
Pre-Tax Deductions (in the order they appear on the employee record)
Post-Tax Deductions (in the order they appear on the employee record)
Federal Income Taxes
State Income Taxes
Local Income Taxes
Viewing Carryover Balances
Carryover Balances can be viewed on the Pay Run Details page, the Payment Details page, and the Negative Balances report in Workforce.
Pay Run Details
When Net Pay Shortfalls is enabled, the Pay Run Details page displays a '!' next to any Payment that has a Carryover Balance. Hovering over the '!' displays the following message:
'Net Pay is insufficient to cover deductions. Deductions and withholdings were collected in order of priority, any additional balances will be carried over into future payments.'
Select a Payment line to open the associated Payment Details page.
Payment Details
When Net Pay Shortfalls is enabled, the Payment Details page displays two additional columns — 'Collected' and 'Carryover Balance' — for any Payment with Carryover Balances. These columns appear only when a Carryover Balance exists for that Payment.
If the Payment has a Net Pay Shortfall, a '!' also appears at the top of the page next to the date. Hovering over the '!' displays:
'Net Pay is insufficient to cover deductions. Deductions and withholdings were collected in order of priority, any additional balances will be carried over into future payments.'
Negative Balances Report
The Negative Balances report displays all outstanding deduction Carryover Balances across employees. To access it, navigate to Reports → Workforce Reports → Payments → Negative Balances → View. Selecting an employee from the report opens the Negative Balance Detail view, which includes a per-deduction breakdown in the Negative Balance Details sidesheet.
Access to the Negative Balances report requires the View Reports permission under Payroll → Workforce Payroll → Reports. Any default or custom role with this permission can view the report, subject to location and security scoping. Note that this report covers deduction carryover balances only — tax shortfall balances are not included.
Resetting Carryover Balances
Automatic Tax Withholding Reset
At the end of each calendar year, R365 automatically resets tax shortfall balances to zero. Any taxes that went uncollected during the year are reflected on the employee's annual tax forms. The employee may owe the under-withheld amount when filing their return — this is handled between the employee and the IRS, not through future payroll withholding.
Tax shortfall carryover balances do not roll into the new calendar year. Deduction carryover balances, however, do persist until resolved by sufficient employee earnings. Monitor ongoing deduction carryover using the Negative Balances report.
Once carryover balances have been resolved — either through subsequent payroll earnings, year-end tax reset, or admin action — the '!' indicators on the Pay Run Details and Payment Details pages will no longer appear for those payments.