Definitions — Paying the piper

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Image source: Edmund Evans, Public domain, via Wikimedia Commons

 

Whether you believe the expression comes from the Pied Piper of legend or the old proverb, paying the piper does not always mean you get to call the tune. Sometimes the one who makes the rules gets to choose the music. That’s the case with the rules for correcting payments of federal income tax withholding. How familiar are you with those rules?

You’re probably aware of the “X” forms, such as Form 941-X, which are used to correct certain employment tax reporting errors. You can complete these forms when you need to claim refunds, make adjustments, and request abatements of employment tax.

However, you’ll generally only be able to correct federal income tax withholding errors if you find the errors in the same calendar year you paid the wages. For mistakes made in prior years, you can correct federal income tax withholding errors only if they are administrative errors.

What are administrative errors?

In Chief Counsel Advice 201727008, the IRS answered that question by defining administrative errors as transposition or basic math errors, such as addition, subtraction, and multiplication computations, in which the amount reported on Form 941, line 3 (Federal income tax withheld from wages, tips, and other compensation), doesn’t agree with the amount withheld from an employee’s wages.

Given that definition, say you were required to withhold $400 of federal income tax from an employee’s bonus. The bonus was paid in December 2016 and you withheld zero federal income tax. You discovered the error in March 2017.

Would you be able to file Form 941-X?

WHAT WOULD YOU DECIDE?

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THE DECISION

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Now say you paid an employee $4,000 of wages for two months of work in September 2016. You withheld $400 of federal income tax at the time you made the payment. You reported the withholding on your 2016 third quarter Form 941.

The employee worked until the last day of September, then quit (failing to complete the two months paid for). After the end of the year, the employee repaid the wages for the second month ($2,000) to your business.

Can you file Form 941-X?

WHAT WOULD YOU DECIDE?

Make your selection, then hover your mouse
over the link beneath “The Decision”

or

THE DECISION

For a full explanation, hover your mouse over the link

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Note: Taxing Lessons provides a summarized version of sometimes lengthy decisions. The full situation may include facts and issues not presented here. Please use the link provided in the post to read the entire document.

This information should not be considered legal, investment, or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment, or tax advice. Always consult your legal, investment, and/or tax advisor regarding your personal situation.

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Sorry, wrong answer :(
Right answer!

Per Form 941-X instructions: You can’t file Form 941-X to correct federal income tax withheld reported on your 2016 fourth quarter Form 941 because the error involves a previous year and the amount previously reported for the employee represents the actual amount withheld from the employee during 2016.

Sorry, wrong answer :(
Right answer!

Per Form 941-X instructions: You can’t file Form 941-X to reduce the federal income tax withheld because you actually withheld the federal income tax from wages. You also can’t file Form 941-X to reduce wages because the wages were income to the employee for the prior year. These amounts were correctly reported on Form 941.

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