This article is meant to solve for Medicare Addl Tax calculation error discovered in the same calendar year that wages were paid caused by the following:
- A high compensation employee was not setup for Medicare Addl Tax in QuickBooks Desktop and was paid over $200,000 in Medicare wages.
- As a result, the Medicare Addl Tax amount and wages did not calculate and report correctly for this employee.
Read below for written instructions:
- Ensure a back up has been created.
To create a back up see Back up the QuickBooks Desktop company file.
- Verify that all employees have the Medicare Employee Addl Tax in the Employee Profile by creating an Employee Withholding Report. Follow steps below:
- From top toolbar of QuickBooks Desktop, click Reports > Employees & Payroll > Employee Withholding.
- Click on Customize Report tab.
- Under Columns, make sure the following taxes are checked:
- Local Tax 1
- Local Tax 2
- Local Tax 3
If you have more local taxes you may have to click additional Local Tax columns. There are 1 through 12 of these in the list. NY and NJ are two states that you will have to do this for. You may need to scroll to the right to see this data.
- Verify that all employee's have the Medicare Employee Addl Tax in one of the columns. If not, edit the employee and follow the steps for adding Medicare Employee Addl Tax in QuickBooks Desktop.
- Create a liability adjustment for all affected Employees for each quarter the employee has paychecks without the Medicare Employee Addl Tax.Note: These 0.00 adjustments are needed in order to create transactions for the Medicare Employee Addl Tax . Without these adjustments, the Payroll Checkup will not make the additional adjustments needed to the Income Subject to Tax and Wage Base amounts.To enter these adjustments, follow these steps:
- Go to Employees > Payroll Taxes and Liabilities > Adjust Payroll Liabilities.
- Date and Effective date should be the last day of the quarter (for example 3/31/20xx for Quarter 1 and 6/30/20xx for Quarter 2).
- The Adjustment is for an Employee. Click Employee to select.
- In the drop down arrow box select the affected Employee.
- Under Taxes and Liabilities in the column below Item Name, click to get a drop down arrow key and choose Medicare Employee Addl Tax.
- In the Amount column enter 0.00.
- In the Wage Base column enter 0.00.
- In the Income Subject to Tax column enter 0.00.
- In the Memo column enter Add new federal tax.
- If you have additional employees affected click the Next Adjustment button and repeat the above procedure.
- Once completed click OK button to close the liability adjustment window and save your changes.
- Run Payroll Checkup. (This will also require you to fix any other errors that you might have with payroll)
- To run Payroll Checkup go to the top toolbar of QuickBooks Desktop, click Employees > My Payroll Service > Run Payroll Checkup.
- Follow the on screen instructions. For more information about how to complete a Payroll Checkup see Run Payroll Checkup.
- On the screen titled Verify wages and compensation for [past or current] quarter(s) your errors (results) will appear. Click the View Errors button and print the results. Enter new liability adjustments dated at the end of each Quarter as follows:
- If QuickBooks Desktop Payroll setup is open, click Finish Later to close. (You must correct prior quarter wages before moving onto current quarter.)
- Click Employees > Payroll Taxes and Liabilities > Adjust Payroll Liabilities.
- In Date and Effective Date enter the last day of the Quarter you are adjusting. Example 03/31/15 for first Quarter.
- The Adjustment is for an Employee. Click Employee.
- Next to Employee click the drop-down menu and select the affected Employee.
- Under Item Name, in the first line select the Medicare Employee Addl Tax and under Amount enter in the amount from Payroll Checkup.
- You do not need to enter amounts for the Wage Base and Income Subject to Tax, the Payroll checkup did that for you in another adjustment.
- For the first employee click the next available line below and select Add New.
NOTE: Once this payroll item is added you will just need to select this item for the rest of the Liability Adjustments.
- In the Add New Payroll Item window, select Deduction, click Next.
- Name the payroll item Recover Medicare Addl Tax, click Next.
- In the Liability account field choose an account that is an Other Current Liability account, click Next.
- Select the Tax Tracking Type of None, click Next.
- In Taxes leave the defaults (unchecked), click Next.
- In Calculate based on quantity select Neither, click Next.
- In Gross vs. net, click to select net pay, click Next then click Finish.
- In the Amount column for this new payroll item, you will enter the total of the Medicare Employee Addl Tax (the amount from the Payroll Checkup) as a negative amount.
- In the Memo column enter Collecting tax money paid to IRS for Employee.
- This new payroll item will be used later to collect back from the employees for the employee taxes that were not withheld in error on their previous paychecks.
- If you have additional employees affected click the Next Adjustment button and enter additional adjustments as needed. Once all the adjustments for each employee affected in the period are entered, click OK to save your changes.
- Run Payroll Checkup. If you receive an error, repeat Step 4 above to enter additional adjustments. Ensure Payroll Checkup has no errors before moving forward.
- File an Amended 941 with the IRS for each past Quarter you already filed.
- Collect the uncollected taxes from the employee.On the employee's next paycheck(s), the Employer will enter this newly set up item, Recover Medicare Addl Tax, to collect back the money that they have already paid.
- Open the Pay Employees module
- Select the employee and click Open Paycheck Detail.
- In the Preview Paycheck, under Other Payroll Items, click below the last payroll item and use the drop-down menu to select Recover Medicare Addl Tax.
- Enter the amount of the deduction you are collecting.
- In the Employee Summary, this amount will show up in the YTD column once you add the Recover Medicare Addl Tax payroll item. If the employee does not have enough Net Pay on one paycheck to recover or deduct the full amount, you will need to make arrangements to take this tax money back in smaller amounts on future paychecks until the full amount is recovered.
- Continue to create the paychecks as normal.
- If you need to continue to collect the amount back across years, see Recover Medicare Additional Tax across years for additional steps.