Oops! You made an error in your small business’s payroll. What now?
There are a variety of possible mistakes that have a variety of fixes. The solutions range in severity and urgency, but the good news is that the faster you catch a payroll error, the easier it is to correct.
Since we’ve worked with thousands of small business owners over the past 50 years, CSI Accounting & Payroll has come to understand the complexities that go into payroll - and we know the common concerns that owners have when it comes to payroll mistakes. Let’s take a deep dive into:
- The path of payroll error documentation
- Examples of payroll errors and their fixes
- How to get a Form 941 amended
Path of Payroll Documentation
If you made a payroll error, do you need to fix it right away? Depending on your state, there may be different rules.
What if you noticed an error from the last cycle, last quarter, or even last year? There may be a path of amendments or changes to make. Payroll changes lead to 941 amendments, and 941 amendments lead to W-2 changes.
Payroll Cycles
Payroll cycles vary, but they’re typically weekly, biweekly, semimonthly, or monthly. If a small mistake is made, it can usually be corrected either right away or in the next payroll cycle. Because of this, it’s rare to have to amend a Form 941.
Form 941
Form 941 is a quarterly tax return and reconciliation. This is how you report to the IRS how much money you paid your employees, the amounts and dates the tax liabilities were incurred, and how much of the tax liabilities you paid. It should have a balance of $0.
The IRS compares the calculated liabilities on Form 941 to the tax deposits that you made throughout the quarter. If the numbers don’t match up, they send a letter. If you overpaid, they’ll inform you of the overage and ask where you’d like to apply the credits. If you underpaid, they’ll inform you of how much you were short and any penalties and interest assessed for late payments.
If you notice that a mistake was made in a prior quarter of the same year, then you can simply file an amended 941, called a 941-X, to adjust the information reported in that quarter.
If you need to amend a 941 from a prior year and change wages or taxes paid, then you also need to adjust that year’s W-2 so they will match. It’s a lot of work when you have to go back to a different year. If you find that a mistake was made in a quarter of a prior year, then you will have to correct both the Form 941 and Form W-2.
Form W-2
Form W-2 is an annual filing that needs to be filed with the SSA each year. It’s used to report taxable wages earned and taxes withheld, as well as information about certain deductions and contributions for each employee that was paid that calendar year.
The company totals for taxable wages and taxes withheld that were reported on Forms W-2 should match the amounts on the cumulative Forms 941 for the same year. The IRS’s Combined Annual Wage Reconciliation unit compares the numbers submitted to the SSA with what was submitted to the IRS, and if there's a discrepancy, you’ll get a letter.
5 Payroll Errors and How to Fix Them
Whether it’s reporting incorrect information or forgetting to submit information, there’s an infinite number of payroll errors that can happen. Here are five examples and their solutions.
1. Not Enough Hours Were Reported
You may want to correct the error right away if you accidentally only reported one week of a two-week pay period for all hourly employees.
This would affect multiple employees, so you could do another check run for missed hours. A fast paper check could suffice here rather than direct deposit especially if the mistake wasn’t noticed until payday.
2. A Pre-Tax Deduction Was Missed (Last Payroll)
If an employee requested to lower their medical deduction, but you missed this or didn’t let your payroll provider know, you could probably wait.
Since this only affects one employee and is typically a small amount, it could be seen as a less-urgent error to correct. Instead of doing an extra check run, you could just add the amount to their next paycheck.
3. A Pre-Tax Deduction Was Missed (Last Year)
If an employee signed up for medical insurance toward the end of last year and the deduction was not communicated to your payroll provider, then the taxable wages were not properly lowered for that amount of time. This employee paid taxes on those wages, but they shouldn’t have.
The correct thing to do is fix the payroll records, amend the Form 941, and correct the Form W-2 as well so the employee can do their tax return based on accurate numbers.
4. A Post-Tax Deduction Was Missed
If you missed a deduction that wouldn’t show on a Form 941 or W-2, such as a payroll advance, then nothing needs to be amended. 941s and W-2s only consider taxable wages and tax liabilities, not post-tax deductions.
Reimbursements are also not taxable, so you can give them to the employee late without having to redo the 941 or W-2.
5. Taxes Were Overpaid
If your prior payroll provider does your medical insurance as post-tax without asking you, it raises a red flag for us. Virtually any company offering a group medical plan qualifies for pre-tax deductions.
We can redo payrolls from previous quarters and then amend your tax return so you can get credit for the overpaid taxes. You will also need to pay back your employees for what they overpaid.
How to Get a Form 941 Amended
A return can be amended to correct wages, federal income tax withheld, FICA wages and taxes, and more. You can amend a quarterly return yourself with Form 941-X, but we recommend working with a payroll provider if you’re not confident.
If you were coming on board with CSI Accounting & Payroll as a new client and had been getting letters from the IRS saying you owed money from previous quarters, here’s how we would handle it.
- We would ask for a copy of your tax return to see what the IRS is seeing. What does the tax return say, and what did they get for tax payments in that quarter?
- We would also log into the Electronic Federal Tax Payment System to see what 941 payments were made in that quarter.
- We compare the payments to the tax return and see if there is a discrepancy.
If the payrolls were run correctly but the 941 is incorrect, we’ll fix it. If you just didn’t make all of the payments that you were supposed to, then you’ll need to make up for it.
To dig in and see where any inaccuracies were in the calculations, then we need the payroll records for that quarter to do our own quarterly reconciliation. As long as the numbers are in the right buckets, then the calculations should be right.
Avoid Payroll Mistakes in the Future
Fixing mistakes is no fun, but recognizing them is the first step. Now you know about the path of error documentation, how to handle some common payroll errors, and how to amend your quarterly returns. How can you keep moving in the right direction? If you’re facing repeat errors or are not confident in your payroll processes, it’s important to invest in a payroll provider.
Correctly setting up automation or having a professional do it pays off. Not only do you incur penalties and interest for errors, but when a payroll provider has to go back and amend a tax return that they didn’t create, they have to charge you for the work anyway.
If you’re ready to have a conversation about if CSI Accounting & Payroll is the right fit for you, click the button below for a free consultation.
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