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How to Reduce a Gross Pay Payroll?

I have an interesting situation that maybe someone has a solution to. An employee receives an overpay in 2010 of $5K. The company asks the payroll service to redo that payroll to the lower gross pay amount and refile the quarterly and annual reports. The problem is the tax was already impounded based on a higher gross amount. The payroll service says there is no way to get that tax back. The payroll service W-2 no longer would reflect that tax on their payroll. The W-2 with the correct documentation about tax impounded is being invalidated.

Shockingly the payroll service says it has no way to document this for the IRS and state. So the risk here is that the taxes collected would not be properly credited to the taxpayer, and there doesn't seem to be any valid documentation of the taxes paid since the W-2 that does document the payment is being made invalid / corrected.

How do you correctly document this situation to the IRS and state, so that that taxpayer is properly credited for taxes impounded, while simultaneously having a corrected, lower gross salary reported?

Reply to
W
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underpay the employee $5,000 in 2011?

Reply to
Pico Rico

Unfortunately, because of the mistake the taxpayer is moved out of a tax bracket where a Roth IRA contribution is possible, so not correcting the mistake in 2010 has a material impact on the employee.

Reply to
W

somehow, I knew there would be an issue like that.

Reply to
Pico Rico

I assume that "impounded" means withheld. Tax is withheld for four items: FICA, Medicare, Federal Income tax, and State Income tax. The last two cannot be corrected after the end of the calendar year. The corrected W-2 will show the corrected gross, the corrected FICA/ Medicare, and the original Fed/State Income tax withheld. The employee gets the excess back when he files his income tax returns.

Phil Marti VITA/TCE Volunteer Clarksburg, MD

Reply to
Phil Marti

What is strange to me is that a big payroll service has no mechanism for just reporting an overpayment of Federal and State tax! How difficult would it be to revise the payroll to $X - $5000 and just report the actual taxes paid, which is an overpayment? Rather than just telling the truth, the payroll service wants to falsify the W-2 have it report what *should* have been paid as tax instead of what was *actually* paid as tax. Aside from the fact that their computer systems cannot deal with the truth, I wonder if that is even legal for them to do?

Reply to
W

That may be what it *should* show. The payroll service claims that it will not show that. The payroll service wants to revise the W2 to state the Federal and State tax as it would have been if the gross had been paid correctly in the first place.

I agree with your version and I am perplexed by theirs.

Reply to
W

What does that mean? The employee was _actually paid_ more than the company believes he should have been? Was the excess money returned? When?

Assuming the employee repaid the $5K (e.g. by check on December 31), the employer should just do a corrected W-2 with $5K less gross pay and the same withholding.

Seth

Reply to
Seth

But how do they propose to show the overpayment? If they show it as an overpayment, presumably it could be treated as an overpayment for the following year. If they don't show it at all, seems to me, it's theft.

Reply to
Stuart A. Bronstein

I don't understand what you mean by IMPOUNDED, perhaps if you'd clarify that we could help more.

IF the employee's W-2 was calculated improperly and he was paid too much, which resulted in too much withholding - then amending the payroll returns for the proper quarter and issuing a W-2C should be sufficient. You'll also have to file an amended reconciliation with the state - in Maryland Form MW506 goes in periodically to report the taxes withheld. At the end of the year Form MW508 goes in to reconcile the withholding for the entire year. Its a PIA but these forms can be amended and a refund issued by Maryland to return any overpayment.

I am curious, who is the payroll company?

Gene E. Utterback, EA, RFC, ABA

Reply to
Gene E. Utterback, EA, RFC, AB

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