How Do I Fix a Payroll Tax Return?

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In a payroll professional’s perfect world, every transaction, report, and tax filing would be completed on time with 100% accuracy, every time. Unfortunately, this is not always the case. At one point or another in their careers, a payroll team may find themselves in a situation requiring some type of correction. Some corrections might be quick and simple, while others may take some extra time and effort and could even involve amendments and corrected tax filings.

Some examples of items that might require amendments include clawbacks of overpaid wages or previously unreported items which could impact employee wages and employee/employer taxes. Over- or under-reported wages and deductions, and other improperly handled payroll items can be common culprits as well. With the COVID-19-related employment tax credits, many employers find themselves reporting revised numbers due to changes in the legislation and to appropriately claim their applicable tax credits for qualified wages.

However, while the corrections may need some additional work in the way of off-cycle or manual processing, not all the scenarios above will necessarily require amended filings. Since many of the required tax filings are done on a quarterly basis, if issues are discovered early, there could be an opportunity to address the items within the same calendar quarter. This means everything is squared away, and the quarterly data is clean. Unfortunately, many issues go unnoticed for several pay cycles. Sometimes, it could be months or even years before items are found. If this is the case, proper reconciliation and processing corrections can be much more involved, depending on the issue and the severity.


Will my payroll software produce an amended return?

Many of the modern payroll processing and recordkeeping solutions today can make it relatively easy for an organization’s payroll team to produce and submit its period tax filings, such as Form 941, based on the payroll items which were processed during each quarter of the year. When it comes to backdated corrections that cross over multiple quarters or years, it may not be so simple. Oftentimes the payroll software will not automatically produce amended filings, so the payroll team will need to know how to recognize and identify the situations that may require a 941-X, W-2 C, or other corrected tax form.


What forms do I need to amend?

Generally, any issue that impacts the reported wages or taxes in a prior quarter will require a 941-X. It may seem like unnecessary and extra work to make corrections for a prior quarter, especially if amounts can be adjusted in a subsequent quarter, but improperly handled corrections could cause problems for future reconciliation. Issues that aren’t addressed or not handled correctly can lead to costly penalties and potentially take even more time to fix in the future. Improper corrections might also create issues if uncovered during an audit.

If the error occurred in a prior year and impacts an employee’s reported wages and/or taxes, corrections will also need to be made on the employee’s W2. If the W2 has not yet been filed with the Social Security Administration (SSA) for the affected tax year, a new form W2 may be generated with the correct information. Corrections that are made after the W2 has been filed will require form W-2 C to be issued to the employee and filed with the SSA. In either case, if the employee previously received a W2 with incorrect information, there is a chance the employee has already filed their tax returns using the incorrect form. If this is the case, the employee may need to re-file their personal returns with the information provided on the corrected W2. Some employers may choose to reimburse employees for the cost to prepare and re-file their returns, especially if the W2 corrections are due to an error made by the employer.

Once an issue is identified, addressing it and processing the corrections may seem like a daunting task. Breaking it up into manageable chunks can help to make the task less overwhelming and in making sure any steps aren’t missed along the way. Determining whether the issue will require a backdated correction, or if it can just be addressed moving forward will be helpful in determining the necessary actions that need to be taken. If the error requires corrections that need to be made on a prior quarter’s tax filing, a 941-X will have to be completed and filed.


941 Corrections

Form 941-X, also referred to as the Adjusted Employer’s Quarterly Federal Tax Return, is used to re-submit any amended information that was incorrectly reported on Form 941 for a prior quarter. Errors might include incorrectly reported wages, taxable wage amounts, tax withheld, as well as deferred tax amounts and adjustments related to sick and family leave wages which qualify for certain tax credits. A separate Form 941-X should be used for each quarter that is being corrected, so errors spanning multiple quarters will require multiple forms. The specific year and quarter that is being adjusted should be marked at the top of each form.

Part 1 of the form is used to state whether this is for an adjustment to a previously filed return or if the form is being filed with the purpose of making a claim for refund or abatement due to overreported tax amounts. Depending on the selection made in part 1, the appropriate fields in part 2 should be completed.

Part 3 of the form is where the corrections should be entered. Note that amounts should be entered in part 3 only for the items that need to be adjusted. For each item requiring an adjustment, enter the correct amount, the amount that was originally reported, and the difference. Credits due to previously overreported amounts may be entered as negative numbers. Items that were reported correctly on the original Form 941 filing and do not need adjustment should be left blank.

In part 4 of the form, the corrections need to be explained. Per the IRS, each correction in part 3 should be explained in detail on line 43. Each explanation should include the affected line number on Form 941-X, when the error was discovered, the cause of the error, and the amount of the error. Providing as many details and facts supporting each correction will help avoid delays in processing, as incomplete or vague explanations may prompt the IRS to reach out for more information. Additional sheets may be attached if more space is needed for the explanations.

Once all of the errors and corrections have been addressed, the preparer of the form should sign and complete part 5 before submitting. If corrections are for underreported tax amounts, payment for the amount owed should be submitted as well. Overreported amounts may be applied as a credit to the current quarter or claimed as a refund or abatement of amounts owed. Depending on the address of the business, forms should be submitted via mail to the appropriate IRS office. Detailed instructions on how and where to file Form 941-X can be found at the IRS website.


W2 Corrections

As previously mentioned, a revised W2 or W-2 C may need to be issued to affected employees if the correction is for a previous tax year and has an impact on the individual’s reported wages or taxes. If the incorrect W2 forms have not yet been filed with the SSA for the affected tax year, revisions can be made before filing with no need for a W-2 C. Some employees may have already filed their personal returns with the incorrect forms, so it’s important to communicate as soon as possible if corrections to their W2 forms are expected.

A form W-2 C is used to make corrections and adjustments to previously reported figures on an employee’s W-2. In addition to the underreporting and overreporting scenarios that might require W-2 corrections, some other items that could create the need for a W-2 C are incorrect Social Security numbers, misspelled employee names, or incorrect addresses. Note that a W-2 C created solely for the purpose of correcting an employee’s address does not have to be filed with the SSA.

Boxes A through D should be completed on all W-2 C forms. Similar to the 941-X, only the items that are being adjusted should be completed on the W-2 C. Once all adjustments have been made, the W2-C can be distributed to the employee, and also filed with the SSA. Employers with 250 or more W-2 Cs are required to file electronically. Detailed instructions on completing the W-2 C can be found in the General Instructions for Forms W-2 and W-3 published by the IRS. The SSA also provides some helpful tips when it comes to filing the forms.

There is a bit of overlap when it comes to the data that is reported on the 941 and W2, so it is not uncommon for a W-2 C to trigger a 941-X, and vice versa, particularly when errors are discovered for prior calendar years. In cases where the issues have gone unnoticed for an extended period of time, this could mean the team has to complete and file amended returns for several quarters over multiple years. Widespread errors could mean that W-2 Cs are required for a large employee population. As one can imagine, this could be quite an unpleasant experience. While every organization is different and there is no one-size-fits-all solution, there are some things a payroll team can implement in their regular processes to limit their risk of error.


How can I reduce errors?

One of the best things a payroll team can do is communicate with other departments. It’s not uncommon to hear from payroll professionals who have stories of their HR departments developing policies and making special arrangements with employees for bonus payments or awards without conferring with payroll, or accounting departments mistakenly issuing payments as non-taxable reimbursements to employees when they should have been taxed. Keeping the lines of communication open can create the opportunity for payroll to be part of the discussion and make sure all employee compensation is handled and recorded appropriately.

Periodic system audits can be used to ensure that the payroll software is properly set up, so all earnings and deductions are calculated correctly and taxed appropriately and accurately. A general best practice for system audits might include a full review of all codes once a year, and any new codes reviewed at the time of setup and/or during the first pay period in which the new codes are used. This way, issues may be discovered and taken care of before it’s too late.

Regular reviews of quarter to date, year to date, and preliminary W-2 data can be extremely helpful in preventing errors in periodic filings and can also reduce the number of amendments and W-2 Cs that need to be completed. Most payroll platforms have the capability to display this data, and taking the time to review the information before the quarterly or annual filings are completed gives the team an opportunity to catch and fix any issues without going through the process of having to produce and file amended forms.

When errors are found, be sure to document the causes and corrective measures taken. This can help the department avoid running into the same issues in the future. Proper documentation is also helpful for organizations that may have frequent employee turnover in their payroll department. Having the documentation to reference will help future team members understand what happened. This can be especially helpful during audits or reconciliations.

One of the best ways to limit errors and amendments is to partner with a trusted service provider like Valor Payroll Solutions. These organizations employ experts who are there to ensure accurate processing, record keeping, and reporting of payroll data for their clients. Many will also complete and file amended returns and W-2 Cs as needed, giving business owners peace of mind and allowing organizations to spend more time focusing on what is important for their business.

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Christina Hageny

President - Valor Payroll Solutions

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Christina Hageny

President - Valor Payroll Solutions

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