An employee received a refund from her HSA account for an excess contribution for current year. As the original contribution was made pre-tax, how do we now tax the employee for her refunded HSA?

Good day, @AKAPCM.

Thanks for reaching out to us today. I can help you refund the employee from her excess HSA contribution.

You'll have to set up and add a non-taxable payroll item on the employee's upcoming paycheck to refund the excess contribution. There's no need for you to apply a tax on the refund item since you're giving back the net amount.

Here the steps in creating a non-taxable reimbursement payroll item:

1. Click the Lists menu.
2. Choose Payroll Item List.
3. Right-click on your mouse and click New.
4. Choose the Custom setup radio-button and click Next.
5. Select the Addition radio-button and click Next.
6. Enter the payroll item name and click Next.
7. Select the expense account and click Next.
8. Choose None for the Tax Tracking type and click Next.
9. For amounts paid per mile/kilometer, select the Based on Quantity checkbox and click Next.
10. Choose to calculate on net pay and click Next.
11. Enter a Default Rate and click Finish.

When creating a paycheck for your employee, make sure to add the payroll item under the Other Payroll items section.

That should refund your employee for the excess contribution, AKAPCM. Just leave a comment below or mention my name if you have other payroll concerns. I'm always here to offer help.

Thank you for you message, HoneyLynn.  The company did not refund the employee for the excess HSA contribution.  The employee received the refund from the bank where the employee has an HSA account. 

The company withheld the original excess HSA from the employee's paycheck as pre-tax and deposited the funds into the employee's HSA account.  Now that the employee has received the refund back from the bank is there a way that the company can recognize that the amount was taxable and withhold the corrected tax amount from employee's next paycheck?  And also reduce the amount that is recorded in the general ledger as contributions to the HSA account, so the employee's W2 will also be correct? 

Bank that refunded the HSA will file a "Distribution of excess HSA contribution form" so record of company should match bank's records.

Hey @AKAPCM,

You can adjust your employee's payroll liabilities to correct their taxes. I'd love to share some details about this and help you.

Before creating a payroll liability adjustment, you'll need to run a Payroll Checkup to review your employee records. 

Once done, you may follow these steps to create the liability adjustment.

1. Click on Employees from the menu bar.
2. Select Payroll Taxes and Liabilities, then Adjust Payroll Liabilities.
3. In the Date field, enter the date for the adjustment.
4. In the Effective Date field, enter the date you want the adjustment to affect your liability balance.
5. Choose whether to associate the liability adjustment with the company or to a specific employee.
6. In the Amount column, enter the amount of the adjustment.
7. If you want to increase the amount owed, you need to enter a positive number. But if you want to decrease the amount owed, you need to enter a negative number.

Once done, you can review your Payroll Summary report to verify that the amounts are correct.

Feel free to read this article for more information: Adjust Payroll Liabilities.

If you have other questions about payroll adjustments, feel free to leave a comment below. I'd be happy to assist you.

Hello Alessandra_B.  Thank you for your message.  If I understand this correctly, if I create an adjusted payroll liability for the employee - it will reduce the amount of the stated contributions to the employee's HSA account in the company records (which would match the bank HSA account) and it will create additional payroll tax on the amount the employee had refunded by the bank?  Does this create additional taxes for the employee and if so, when and how would these taxes be withheld from the employee's pay?  Once this payroll liability is set up would the taxes be withheld the next time payroll is run for this employee?  Step 7 says to choose whether to associate this liability with the company or the employee - would I need to choose both? As both the company and the employee owe taxes on the pre-tax refunded amount - is the company portion of tax also created when payroll liability is created? Again, thank you for your assistance!

Thank you for getting back to me, @AKAPCM.

I'd love to provide further details about your employee's taxes.

When creating a payroll liability adjustment, it can increase or decrease their contribution.

Also, in the article I've provided above, for step 7, you'll need to choose Employee Adjustment. 

When adjusting a deduction item on your employee's payroll, and it affects the taxes, you have the option to include it on the adjustment. Or you can let QuickBooks auto-calculate your employees taxes the next time you run their payroll. 

Fill me in if you have other questions about your payroll. I'll be sure to assist you. 

Hi Alessandra_B,

Thank you again for your message and assistance.

Your mentioned "When adjusting a deduction item on your employee's payroll, and it affects the taxes, you have the option to include it on the adjustment. Or you can let QuickBooks auto-calculate your employees taxes the next time you run their payroll."  What are the steps for the option to include taxes on the adjustment or how do I let QuickBooks auto-calculate our employee's taxes the next time we run their payroll? 

Appreciate all your assistance!

Hello AKAPCM,

It would be my pleasure to assist you with any questions you may have regarding some payroll adjustments in QuickBooks Desktop.

When creating payroll liability adjustments in the Desktop version of QuickBooks, the option you'll choose will depend on which side you need to make some corrections. Once you run the Payroll Summary Report and have identified where the discrepancies are coming from, you'll also be able to know which payroll item you need to use.

In the article provided by my colleague, you can include the taxes by following Step 8. To get rid of scrolling up again, you can visit the article I'm adding below:

Adjust payroll liabilities.

You'll see all taxes and liabilities in the list when clicking the drop-down arrow below the Item Name column. I'm adding a screenshot for your visual reference:

For clarification about automatic-calculation, if you have an excess contribution, the system will automatically decrease the amount of tax to be deducted when you run the next payroll. In case you need additional guidance on this, you can also reach out to one of our Support Specialists.

I want to make sure you're taken care of regarding the payroll adjustments. You can follow these steps on how you can reach them:

1. Click the Help tab at the top menu bar.
2. Select QuickBooks Desktop Help.
3. Click Contact us.

I want to ensure that you're able to succeed with the adjustments, so please feel free to let me know how it goes. If you should have any questions, I'm just a click away.

Thank you for your assistance, AlcaeusF.  I did talk with a QuickBooks support person and the reason the taxes were not applying to the paycheck for the refunded HSA excess contribution was because, the tax tracking type was set to HSA Emp (PreTax).  It was suggested that I change the tax tracking to HSA Emp. (Taxable) so taxes would be created for the reduced amount of the original HSA pretax contribution.  I was told by the QuickBooks support person that when the next payroll was run, the adjustment to the employee's HSA account would be properly taxed.  And I was told that the prior HSA withholdings would not be taxed - only the adjustment would be taxed (unless an "Item check-up" is run).  I am hopeful that this will work.  Do you have any thoughts if this will work okay?  Still concerned that once payroll is run 1) either the taxes will not increase to cover the refunded amount of the HSA or 2) the prior months of HSA will also be taxed.