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Handle overwithheld or underwithheld employee-paid taxes

by Intuit Updated 5 months ago

Learn how to handle when an employee-paid taxes are over or under-collected in QuickBooks Online Payroll and QuickBooks Desktop Payroll.

As an employer, it's important to make sure your employees are properly taxed. When employees are underwithheld or overwithheld, you need to make adjustments to correct it.

Here are some reasons you may have under or over collected employee-paid taxes:

  • Your employee wasn’t marked as subject to a tax and should have been.
  • Your employee had a payroll item set up incorrectly. 
  • A tax rate changed.
  • Tax tables weren’t updated.
Note: Not sure which payroll service you have? Here's how to find your payroll service.

Step 1: Create a payroll summary report

The payroll summary report gives you the total payroll wages, taxes, deductions, and contributions. This helps you identify wage and tax discrepancies.

Step 2: Fix the wage and the tax amount discrepancy

Contact us to correct your employee’s paycheck.

Contact us to correct your employee’s paycheck.

Run payroll checkup or create manual adjustments to correct the wage and tax amounts.

Step 3: Refund overwithheld or collect underwithheld taxes on the next paycheck

Once we fix your employee’s paycheck, you’ll receive an email with instructions on how to refund overwithheld, or collect underwithheld taxes.

Step 1: Create a new payroll item for tax adjustments

  1. Go to Lists, then Payroll Item List.
  2. Select Payroll Item ▼ dropdown, then New.
  3. Select Custom Setup, then Next.
  4. Select Deduction, then Next.
  5. Enter the name of the deduction (such as tax adjustment), and select Next.
  6. In the Liability account field, select Other Current Liability, then Next.
  7. Set the tax tracking type to None. Select Next three times.
  8. In the Gross vs. net window,  select net pay, then Next.
  9. Select Finish when done.

Step 2: Refund or collect underpaid taxes

  1. Create and run your payroll.  
  2. Open your employees’ paycheck details. In the Other Payroll Items section, select the payroll item you created in Step 1. 
    • Enter the amount as negative to deduct under collected taxes.
    • Enter the amount as positive to add the refund to the net amount of the paycheck. When prompted by the warning that deductions are normally entered as positive numbers, select Yes.

Note: If the employee no longer works for the company, use the Tax Adjustment item when you create a paycheck to refund over collected tax. If the employee was under-collected, you need to decide whether to collect money from the employee or record it as company expense. Gross-up your employee’s paycheck if you record it as a company expense.

To learn how to pay your employee back for an incorrect paycheck deduction, check out Refund your employee for a deduction that was overwithheld.

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