Late on Payroll taxes? Discover an underpayment error? What to do to correct it without paying for it.
It is sometimes difficult for employers to keep track of and follow the complex rules of supplemental wages, deferred compensation plans, and other compensation arrangements. Not surprisingly, errors come about in determining an employee’s taxable wages and calculating FICA payroll tax and income tax withholding. If an error is found, employers can take action to correct employment tax reporting errors and make an interest-free adjustment, according to IRS section 6205 and 6414.
The regulations state that “an error is ascertained when the employer has sufficient knowledge of the error to be able to correct it.” The following is a sequence of events in making a timely correction:
- Employer files a quarterly employment tax return and discovers an error resulting in an underpayment or overpayment of employment tax.
- Employer fills out Form 941-X – Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund to correct the error through an interest-free adjustment. Form 941X relates line-by-line with Form 941, the Employer’s Quarterly Federal Tax Return. You can file Form 941X at any time when you discover an error, rather than having to wait to file it at the end of the quarter with the next employment tax return.
- Employer timely files Form 941-X by the due date for the quarterly period in which the error is discovered. This filing essentially amends the original quarterly employment tax return. See chart below showing the corresponding “X” forms listed below to correct employment tax errors as soon as they are discovered.
- To request an abatement of assessed penalties and interest, employer must fill out and submit Form 843. to the IRS.
Helpful hints in filling out IRS form 941-X:
- Form 941-X can only be used for one quarter. If there are errors in additional quarters, separate forms must be used and filled out.
- Written consent must be obtained from each employee if the error concerned employee withholding. Each employee must certify that they will not claim a refund or credit for any over-collection.
- On Form 941-X, for each item, the total corrected amount must be filled out along with the previously reported amount, and the difference.
- A detailed explanation must be provided of how you arrived at the corrected amounts.
- Also, look to legal guidance in correcting payroll errors: (1) Treasury Decision 9405 (TD 9405) was issued to amend the process for making interest-free adjustments of employment taxes under sections 6413 and 6205, and claiming refunds of employment taxes under sections 6402 and 6414. (2) Revenue Ruling 2009-39 applies the interest-free adjustment and claim for refund processes under the final regulations issued by Treasury Decision 9405 (TD 9405).
Below is an IRS guide to the corresponding forms in correcting employment taxes errors:
94X Series Adjusted Tax Forms
Finding and correcting an error in the current quarter is a relatively easy process, however, most mistakes are found after the close of the calendar year in which wages are already paid to an employee. The timing of these kinds of errors can be quite confusing and can lead to many more mistakes.
It is best to correct these errors as soon as possible because the IRS will eventually start investigating and assessing interest and penalties. Payroll tax debt is a very serious issue with the IRS. Consider hiring a tax attorney to assist you with the entire process to ensure it is completed properly. Please call for a no-cost tax attorney consultation at (619) 639-3336.
This blog post is not intended as legal advice and should be considered general information only.