This is the time of year when mistakes relating to withholding income and payroll taxes rear their ugly heads. Employees start working on their own tax returns only to discover the errors. Then they march off to the HR department in search of an answer. What do you do?
As an HR professional, perhaps you have encountered the situation more than once. Because payroll departments have to determine withholding by checking the IRS tables, it is easy to get confused when onboarding a new employee. It’s easy to begin withholding too much or too little right from the start. But understand this: it is not the end of the world.
There is a three-step process already in place to deal with withholding mistakes. Payroll services provider BenefitMall explains it as follows:
Table of Contents
1. Reconciling with the Employee
The first step is to reconcile with the employee. There are couple of ways to do this. The first option is to essentially do nothing. This puts the onus on the employee to deal with the aftermath of the mistake. If too much was withheld, that employee is going to get a larger refund when filing his or her tax return. If too little is withheld, the employee will have a tax bill to pay.
The other solution is to compensate for the mistake in future paychecks. If too much was withheld, you can withhold less than is required until things even out. If too little was withheld, you can withhold more for a couple of paychecks to make up for it.
2. Correcting 941 and 944 Forms
Most businesses file 941 forms to report withholding. In cases where withholding mistakes are made, the information contained on the 941 will be incorrect. Correcting this misinformation is a matter of filing form 941-X. File this form as soon as you realize the mistake has been made.
The 941-X requires that you detail the mistake, the figures you use to determine the mistake had been made, and how you plan to correct it.
If you normally file the 944 form to report withholding, you’ll have to correct the information with a 944-X. The information required by the 944-X is nearly identical to the 941-X. It is really just a formality depending on how your company reports withholding.
3. Correcting the W-2 Form
Last but not least is correcting the W-2 form. The W-2 is the form for reporting income and withholding to the Social Security Administration. A corrected form will need to be submitted if you have already filed an incorrect W-2.
For each employee affected, file a W-2c to correct the errors in the original W-2. On this form, you will need to enter both the incorrect information and the new information upon which you are basing the correction. Don’t leave any information out or you risk a delay that could cause problems for the affected employee’s federal return.
Preventing Future Mistakes
Correcting withholding mistakes is a lot of hassle you don’t really need. So if you made such mistakes in the past, it behooves your payroll department to figure out ways to prevent them from happening again in the future. The easiest way to do this is to isolate the procedure, policy, or action that caused the problem to begin with. Then fix it.
BenefitMall says that the best possible preventative measure is to turn your payroll over to a company that specializes in payroll. Their expertise and years of experience mitigate the risk of errors. And when they do make a mistake, they also fix it. That is the way it should be.