Generally, when you withhold a tax inappropriately, it takes two transactions fix the payroll data and then refund the money.
1 - First, enter a liability adjustment (Employees | Payroll Taxes & Liabilities | Adjust Payroll Liabilities) and be sure to negate the tax, the wage base, and the income subject to tax so that your payroll reporting and tax forms will be correct.
You can get the wages and income subject to tax from the Payroll Detail Review report. Find the section for the employee and then the tax and use the totals from the Wage Base and Income Subject To Tax columns.
On the liability adjustment transaction, enter all the numbers as negative numbers.
Then, on the Payroll Detail Review report, should see 0.00 totals for the tax for the employee.
As you record the adjustment, you'll be prompted for an offsetting account to use. Note the account, or change it as needed.
2 - Next, write a check to the employee using the same account.
