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Fix it fast: When to file Form 941-X

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in Office Management,Payroll Management

Oops! You conducted an internal audit of your payroll system to catch ghost employees (good), but you caught something bigger (bad): You discovered that, inadvertently, the proper amount of income taxes wasn’t withheld from an employee’s pay last year. You’re inclined to file Form 941-X to fix the error.

Not so fast: Whether you can correct this error on a 941-X depends on whether the error is administrative.

What kind of error is it? Errors in income tax withholding that are discovered in later years can be corrected on Form 941-X if the error is administrative. The IRS gives these examples of administrative errors:

  • Transposing numbers on Line 3 of your Forms 941
  • Basic math errors, such as addition-subtraction and multiplication computations, in which the amount reported on Line 3 doesn’t agree with the amount that was withheld from the employee’s wages.

The following errors, according to the IRS, are considered nonadministrative errors and can’t be corrected on a 941-X, if they’re discovered in a later year. Reason: Employees have already accounted for that money on their 1040s:

  • The employee’s withholding was calculated using the wrong table
  • A payment that was taxable was treated as nontaxable
  • You picked up the employee’s income taxes on a taxable payment, but didn’t gross up.

TIMING IS EVERYTHING: You must file a 941-X to correct income tax withholding errors made during the current calendar year. As for squaring things up with employees, if they’re underwithheld during the current year, you can adjust their withholding for later pay periods. If they’re overwithheld, you must repay the cash or reimburse them by adjusting their withholding for a later pay period during the same year. Tip: Have employees acknowledge any repayment in writing; reimbursements don’t need a formal acknowledgment, but you should communicate to employees why their net pay has increased.

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