How to Retrieve Overpaid Payroll Taxes

Payroll taxes are one of the largest tax expenses that employers incur. They are, however, one of the most frequently overlooked expenses. How can that be? Taxes are grossed up and then subtracted from gross receipts before taxes are withheld, but payroll taxes are not included in gross receipts. Therefore, when you are calculating payroll taxes, you must add back the taxes—a process known as tax allocation—to gross receipts.


The IRS issues Form 941, Employer’s Quarterly Federal Tax Return, to each employer who has employees. This form is used to report your employees’ wages, employer taxes, Federal Insurance Contributions Act (FICA) taxes, and additional taxes. It is also used by the employer to file quarterly Federal Unemployment Tax (FUTA) payments.


Form 941: Backup Withholding Tax


Whatever you may think of payroll taxes, they do serve an important purpose. In fact, they are the second-largest source of federal revenue (after the income tax) and are a significant portion of state and local government revenues as well. However, did you know that the IRS can’t just take your money and leave it at that? No way. Every payroll tax dollar paid by a taxpayer is subject to an additional 24% federal tax, called a backup withholding tax.


How to Retrieve Overpaid Payroll Taxes


Payroll taxes are the country’s only nationwide tax and are required by the federal government. Since the tax is a percentage of the payroll, some employers may overlook the tax on their federal returns, or fail to pay enough of the tax, or may falsify wages. What do you do if you overpay in payroll taxes?


The IRS is offering a new Form 941-X to those employers that pay too much in payroll taxes (for example, over-collected Social Security and Medicare taxes).


941 Refund Status


For many employers, IRS Form 941-X is a dreaded tax return that can easily result in significant overpayment or underpayment penalties. To avoid risking a penalty, employers should review outstanding payroll liabilities at least every 180 days and submit any overpayments or underpayments to the IRS by the due date of the return, which is generally the 15th of the month for the calendar year.


Some employees receive large refunds due to their wages being calculated incorrectly (even though they are fairly entitled to the wages they are owed). When employers file a Form 941-X, they can’t just file a simple refund request with the IRS. Instead, employers have to provide the IRS with all the information they have on the payroll liability (wage amount, tax year, etc.) and explain why the liability is close to being owed (or why the liability is completely owed) in order for the IRS to make a determination.


Final Words


Form 941 is only one page long, but it’s a workhorse. It’s a backup withholding tax form that helps employers figure out how much federal, state, and local taxes they owe employees, and it can be a huge pain in the neck to fill out correctly.


Attend the Compliance Prime webinar to know about Form 941 Corrections.

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