federal tax error

Thank you for providing the details, @AK646 . I'll share a solution to help fix the error you encountered when entering the employee's information.

The W-2 form will be inaccurate if this error is not corrected, as it will show federal tax withholding that shouldn't have occurred for an exempt employee.

To fix this, let's correct the employee's tax profile and then make a negative payroll liability adjustment.  Since the employee is withheld for federal tax withholding despite their exemption status, entering a negative amount is the best option to decrease or deduct the payroll liability. 

Here's how you can do it:

1. Go to Employees, then select Payroll Taxes and Liabilities. 
2. Choose Adjust Payroll Liabilities.
3. In the Date and Effective Date fields, select the last paycheck date of the affected month or quarter.
4. In the Adjustment is for section, choose Employee Adjustment to correct your employee’s YTD info, then select the employee's name.
5. Under the Item Name column, select the payroll item you want to adjust.
6. Input the Amount of the adjustment. 
7. Under Memo, enter a note about the adjustment for reference. 
8. Select Accounts Affected, then click on OK.
9. Click on OK to close the Affect Accounts window.

Feel free to read this article for more details: Adjust payroll liabilities in QuickBooks Desktop Payroll.

Additionally, you can generate several payroll reports to view your payroll information or business finances. You can also use the features available in the program to manage these reports according to your preferences.

If you have any clarifications or other payroll-related concerns, kindly notify us by dropping a reply below or creating a new post. We are here to help you sort things out. Have a wonderful day!

Would the amount of the adjustment need to be a negative since the error was over withholding? Can you explain wage base adjustment?

Thanks for getting back to us, AK646. I'll provide some answers to your additional queries and help you in managing your payroll.

When performing payroll adjustments in QBDT, wage base adjustment refers to correcting an employee's year-to-date (YTD) payroll information related to wages. It allows you to adjust the YTD amounts for specific payroll items, such as wages, bonuses, or other earnings. The common scenarios for wage-based adjustments include the following:

• fixing errors in withholding amounts
• adjusting retroactive pay
• accounting for circumstances like overpayments or underpayments

On the other hand, the amount to be adjusted based on whether the item is under-withheld or over-withheld. Since the employee is withheld for federal tax withholding despite their exemption status, entering a negative amount is the best option to decrease or deduct the payroll liability. Step 7 will be optional if you want to change the wage base of that specific employee. Here's an image for visualization:

Furthermore, you can create a payroll summary report to check if everything is corrected and updated and a payroll liability balances report to review the amounts paid.

The information clarifies your concerns about payroll liability adjustments. If you have other clarification on managing payroll changes, we're just a click away and ready to help.

@AK646 

RE: How will this affect employees w2 at the end of the year?

There won't be any issues with the W-2 itself, or any other tax form. The amount withheld will correctly appear.

RE: How do I fix this error in QuickBooks Desktop? 

First, note that for federal income tax withholding, there is no one correct amount based on wages paid. In other words, there is no way to determine if the "correct" amount was withheld in aggregate and over time by reviewing the numbers after the fact. This is different than other taxes, fix-percentage taxes, and you can look at the result and determine if it is correct by recalculating it in aggregate. This is because the tax is impacted by the Employee's W-4 elections, and because they can change multiple times per reporting period, like a quarter or year.

At the same time, you as the employer are required to follow the Employee's W-4 elections. If you do not, and it can be proved you did not, you can be on the hook to pay the employee's tax bill (in the case you under-withheld). It's rare, but is has happened. 

Your case is a version of something that happens all the time when an existing employee updates their W-4. What if, for example, the payroll department doesn't update the employee's configuration for a couple of weeks? Is there an error if a paycheck is issued before the change is made? Maybe. Or maybe that's just to be expected given the timing of the W-4 submission. In the end, though, there is no technical error in such a case. All will work within the payroll system as expected.

You essentially have two options:

- Ask the employee if they're OK with what happened. Note that if they really are exempt from federal tax for some reason, they'll get their tax back when they file as a tax refund. If the employee is OK with what happened, then you don't need to do anything - then there is nothing for you to fix.

- If the employee wants their money back, then the way to do that is to enter a liability adjustment to negate the tax, and then to write the employee a standard check for the amount.