Correcting an employment tax error that is discovered in the year in which the error occurs is generally a simple process. However, employers often discover such errors after the close of the calendar year in which they paid the wages to an employee. The process for correcting those errors is confusing and often leads to further mistakes.
The mechanical process for making adjustments to wages and related taxes varies depending on whether there is a correction to FICA taxes or to income tax withholding, whether the error is identified before or after the close of the calendar year of the wage payment, and whether there is an overpayment or underpayment of taxes.
Underpayments. If an employer fails to withhold and pay over to the government an employee’s FICA taxes in either a current or a subsequent year, the employer can make an adjustment when the error is discovered to the quarter in which the underpayment occurred. Beginning Jan. 1, 2009, Form 941- X, Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund, can be used to make the adjustment, generally on an interest- free basis under section 6205. (The employer can make a similar correction for its share of FICA taxes.)
If the employer discovers the error after the calendar year of the wage payment closes, the employer also provides the employee and the Social Security Administration a corrected Form W-2 (Form W-2c) reflecting additional FICA earnings, if applicable, for the prior year and FICA tax withholding as if the employer had made it correctly.
This change to FICA wages and FICA tax withholding generally does not affect the employee’s prior-year individual tax return. The regulations provide a specific remedy to allow an employer to recover from the employee’s pay the FICA taxes that the employer paid on the employee’s behalf (Treas. Reg. § 31.6205-1(d)(1)). If the employer does not recover the amount from the employee, the payment of the employee share of FICA tax by the employer is current wage compensation subject to FICA and income tax withholding and is reflected on the employee’s year-end Form W-2.
Overpayments. For overpayments of FICA taxes, the employer may make an adjustment or seek a credit or refund of the employer share of FICA. An employer generally cannot seek the employer’s share of overpaid FICA taxes unless the employer, in its capacity as a fiduciary, also seeks the employee’s share. This adds complications for the employer, including a requirement to gain consent from the employee to claim the credit or refund on the employee’s behalf.
In some instances, the employer must solicit from the affected employee a certification that the employee has not sought and will not seek a refund for the same overpayment amount. However, this requirement does not apply to the extent that the taxes were not withheld from the employee or, after the employer makes reasonable efforts to repay or reimburse the employee or secure the employee’s consent, the employer cannot locate the employee or the employee will not provide consent.
Typically, employers make income and FICA tax withholding errors at the same time, and these adjustments are undertaken together. While the newly released Form 941-X has improved the adjustment process, employment tax adjustments often remain cumbersome.
For a detailed discussion of the issues in this area, see “Correcting Employment Tax Errors,” by Kathleen Mort, CPA, and Dan Boeskin, J.D., in the July 2009 issue of The Tax Adviser.
—Alistair M. Nevius, editor-in-chief
The Tax Adviser
Also look for articles on the following subjects in the July 2009 issue of The Tax Adviser:
- A discussion of deducting losses for defrauded investors.
- An examination of clergy tax rules.
- An analysis of the new expatriate mark-to-market rules.
The Tax Adviser is the AICPA’s monthly journal of tax planning, trends and techniques. AICPA members can subscribe to The Tax Adviser for a discounted price of $85 per year. Tax Section members can subscribe for a discounted price of $30 per year. Call 800-513-3037 or e-mail firstname.lastname@example.org for a subscription to the magazine or to become a member of the Tax Section.