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How to Correct Form 941 Errors
As a member of the national association for bookkeepers, we want to offer you the latest information about changes in recordkeeping, reporting, bookkeeping and payroll as reported in The General Ledger (www.aipb.org/general_ledger.html). This is a SECOND DISTRIBUTION on the topic "How to Correct Form 941 Errors ."


We have added to this issue a recent court decision on nonqualified deferred compensation that we want you to know about. The following is taken from the forthcoming issue of The General Ledger newsletter (www.aipb.org/general_ledger.html).

To correct current year FITW overpayments:

  1. Complete the 941, Line 7d, in the quarter when you find the error.

  2. Complete and attach a 941c.

  3. Reduce current quarter deposit liabilities by overpayment amount, or obtain a refund by filing an 843 with the 941 and 941c.

To correct current year Social Security and Medicare overpayments:

  1. Complete the 941, Line 7e, in the quarter when you come across the error.

  2. Complete and attach a 941c.

  3. Reduce current quarter deposit liabilities by overpayment amount, or obtain a refund by filing an 843 with the 941 and 941c.

To correct prior year FITW overpayments caused by administrative errors:

An administrative error is one that does not affect the W-2. For example, you would be entitled to an abatement if you overpaid FITW in a prior year, showed the correct FITW on the W-2, but deposited too much tax.

  1. Complete Form 941, Line 7d, in the quarter when you come across the error.

  2. Reduce current quarter deposit liabilities by overpayment amount, or obtain a refund by filing an 843 with the 941 and 941c.

To correct prior year Social Security or Medicare tax overpayments:

Obtain from employees a signed affidavit stating that the overpayment was refunded and that no overpayment claim has been or will be made on the employee’s 1040. If there was no Soc. Sec. or Medicare overpayment, no affidavit is needed. After you have obtained the signed affidavits — or if you did not give a refund:

  1. Complete Form 941, Line 7e, in the quarter when you come across the error.

  2. Reduce current quarter deposit by overpayment amount, or obtain a refund by filing an 843 with the 941 and 941c.

Summary of steps for correcting 941 underpayment errors

To correct current or prior year FITW underpayments:

  1. Complete Form 941, Line 7d, in the quarter when you come across the error.

  2. Complete and attach a 941c.

  3. Increase current quarter deposit liabilities by underpayment amount; deposit full amount in the quarter the error is found.

To correct current or prior year Social Security or Medicare underpayments:

  1. Complete Form 941, Line 7e, in the quarter when you come across the error.

  2. Complete and attach a 941c.

  3. Increase current quarter deposit liabilities by underpayment amount; deposit full amount in the quarter the error is found.

Important: Taxes unpaid by the last payment date accrue interest at the fed short-term rate + 3% + 941 failure-to-file penalties. [IRC §6601; IRS Reg. §301.6601-1; IRS Prop. Reg. §301.6601-1] However, if corrections are made according to the instructions, interest charges are waived. Although penalty charges will still apply, generally they are waived upon a request for abatement. Employees usually pay underwithheld FIT amounts on their 1040. If they do not, the employer may be liable for unpaid amounts. But the employer may obtain a credit if the employee certifies he/she paid the tax when filing his/her 1040. [26 CFR 31.3403-1]

Taxing deferred compensation

Mr. A, participant in a nonqualified deferred compensation plan that made distributions net of taxes, received a final distribution when the employer went out of business. His W-2 included the distribution in gross income and reported only $500 FITW. Mr. A deducted from gross income the amount he calculated the employer should have paid in taxes, claiming the W-2 was incorrect.

Decision: For the IRS. A distribution from a nonqualified deferred comp plan is included in gross income. The taxpayer can claim as a credit FIT withheld from the distribution or paid for him by the employer. If taxes were not properly withheld or paid, Mr. A had to resolve that with the employer, but is obligated to report all gross income received and pay all taxes on it whether or not the employer paid them. [Ackerman v. Comm’r., T.C. Memo 2006-3]


Source: American Institute of Professional Bookkeepers
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