Complications from implementation of the retroactive income tax increase has the state refunding hundreds of thousands of dollars to employees whose paychecks shrank when the state inadvertently withheld too much money.

The state comptroller’s office is issuing a total of $350,704.17 in refunds to around 1,500 state employees, most of whom were maintenance workers employed by the Department of Transportation and state universities, spokeswoman Tara Downes said Wednesday. Most worked significant overtime cleaning up after the October snowstorm, she said.

The problem stems from initially incomplete instructions from the Department of Revenue Services for payroll software to adapt to the income tax change, Downes said. Without complete instructions, some software was unable to properly recognize temporary income spikes caused by substantial overtime or bonuses, she said.

The issue also impacts private sector workers whose employers are using payroll companies whose software has not properly adjusted to the new income tax increase, which went into effect in August giving employers five months to collect a year of taxes.

“It’s thinking that this person is in a higher income bracket and not recognizing that this is a one-time thing,” DRS spokeswoman Sarah Kaufman explained.

Programs designed to determine how much money is withheld from a paycheck have in some cases looked at the amount of money that came in during a high-income period and applied it to the entire year, she said. In other cases employee paychecks were under withheld, she said.

Kaufman said the problem first surfaced in the aftermath of Tropical Storm Irene when some employees worked significant overtime. She said the initial instructions were somewhat misleading.

“There was some miscommunication early on and we didn’t provide enough guidance in the beginning,” she said.

The department reissued instructions to software companies to correct the problem, Kaufman said. Some companies have been able to make the system changes easily but others have had a difficult time correcting the problem, Downes said.

DRS Commissioner Kevin Sullivan said the incomplete information was only out for a brief period of time when the department offered instruction to payroll companies in May.

“In May the very first guidance we put out was not as informative as it should have been. For maybe two weeks, in May I’m going to take a lump for that,” he said.

But the department quickly changed the instructions and has been advising employers using every publication means it has, he said. Since then, payroll companies have had months to prepare for the change, which took effect in August, he said.

Sullivan said part of the problem was the way the legislature chose to implement the tax. Traditionally retroactive taxes are executed in a way that withholds more money from paychecks but avoids the problematic computation in payroll software, he said.

“The sad irony is if this was a hundred years ago and we were all doing hand payroll this wouldn’t have been an issue,” he said.

Employees whose paychecks were overwithheld will get a larger tax return when the year is out, he said.

“The system makes people whole. But the problem is there’s not a lot of people who can afford to wait,” he said.

A larger tax return next year is cold comfort for people who worked significant overtime to prepare for holiday expenses only to have the extra money withheld from their paychecks, Sullivan said. Those people have some options to get the money back sooner, he said.

For one thing workers can sit down with their employers and ask to be refunded the amount that was overwithheld, as the comptroller’s office has done for state workers, he said. Employees can also use the DRS website to estimate their tax liability and use a CT-W4T form to set their withholding status to recover the extra money, he said. Tax liability information was posted early this year to help people deal with the problem, he said.

Sullivan said the software glitch has not been the only problem to surface around the retroactive income tax increase. It has come to light that some employers throughout the state have not begun withholding the tax from paychecks yet, he said.

Sullivan said he’s heard of at least one employer who wants to take the entire year’s retroactive withholding out of a single pay period, which could effectively eliminate an employee’s paycheck.

While the tax rate would still be correct, he said companies that chose to do that would be in violation of the law, which was designed to let workers absorb the extra costs in manageable bites.

“We’re going to come down hard on these companies when we identify them,” he said.