Correcting employment taxes

The IRS has developed the 94X-X forms to correct errors on a previously filed employment tax return. These forms correspond and relate line-by-line to the employment tax return they are correcting. However, there is no "X" form for the Form 940. Taxpayers use a Form 940 for correcting a previously filed return by checking the amended return box in the top right corner of the Form 940.

Employers should use the corresponding "X" forms listed below to correct employment tax errors as soon as they are discovered. For example, use Form 941-X, Adjusted Employers QUARTERLY Federal Tax Return or Claim for Refund, to correct errors on a previously filed Form 941.

Taxpayers will continue to use Form 843 when requesting abatement of assessed penalties and interest.

Generally, you may correct federal income tax withholding errors only if you discovered the errors in the same calendar year you paid the wages. In addition, for an overcollection, you may correct federal income tax withholding only if you also repaid or reimbursed the employees in the same year.

For prior years, you may only correct administrative errors to federal income tax withholding (that is, errors in which the amount reported on Form 941, line 3, isn't the amount you actually withheld from an employee's wages) and errors for which section 3509 rates apply. Refer to section 13 of Publication 15, Employer's Tax Guide, for more information about corrections during the calendar year and about administrative errors. Refer to section 2 of Publication 15 for more information about section 3509.

Generally, the rules discussed about income tax withholding adjustments apply to Additional Medicare Tax withholding adjustments.

For overpayments: Employers correcting an overpayment must use the corresponding "X" form. Employers can choose to either make an adjustment or claim a refund on the form.

The "adjustment" process is used when an employer wants to have the overpayment applied as a credit to the tax period for the quarter during which the Form 94X-X was filed.

The "claim" process is used to request a refund or abatement of the overpayment.

If you file Form 94X-X to correct overreported tax amounts in the last 90 days of a period of limitations, you must use the claim process. You can't use the adjustment process.

For underpayments: Employers correcting an underpayment must use the corresponding "X" form using the adjustment process. Amounts owed must be paid by the receipt of the "X" form. Payments can be made using EFTPS, by sending a check or money order, or by debit or credit card or digital wallet (for most "X" forms).

If you're using both the adjustment process and the claim process, you must file two separate forms. For the adjustment process, file one Form 94X-X to correct the underreported tax amount and pay any tax due. For the claim process, file a second Form 94X-X to correct the overreported amounts.

Interest-free adjustments and refund claims

Although employers have until the due date of the tax return for the tax period in which an error was discovered to file the applicable Form 94X-X reporting an underpayment adjustment, regulations require employers to pay any underpayment of tax by the time the adjusted tax return is filed to qualify for interest-free adjustments under IRC 6205 and 6413 and claims for refund and abatement under IRC 6402, 6414, and 6404. Otherwise, the correction will not qualify for a completely interest-free tax adjustment. Rev. Rul. 2009-39 PDF illustrates the application of the interest-free adjustment and the refund claim process. There are no interest-free adjustments for underpaid FUTA taxes.

Employee consents to support a claim for refund

Revenue Procedure 2017-28 PDF provides guidance on the requirements for employers to obtain employee consents to support a claim for refund of overpaid Federal Insurance Contributions Act (FICA) and the Railroad Retirement Tax Act (RRTA) taxes. It clarifies the basic requirements for both the request for employee consent, and for the employee consent itself. The revenue procedure allows consent to be requested, furnished, and retained in an electronic format. It also contains guidance concerning what constitutes "reasonable efforts" if employee consent is not secured in order to permit the employer to claim a refund of the employer share of overpaid FICA or RRTA taxes.

Voluntary Closing Agreement Process – Employment Tax Issues (VCAP–ET) 

The IRS has established a voluntary administrative process to allow certain employment tax issues not involving worker classification to be permanently and conclusively resolved through a closing agreement program. The objective of this voluntary process is to reduce administrative burden by saving time and resources for both the IRS and taxpayers and to enhance voluntary compliance in specified limited situations. Under this administrative process, along with other specific requirements, taxpayers must demonstrate that Form 94X-X and other correction procedures would not allow for the prompt, permanent, and conclusive resolution of the issue(s). While these procedures provide for the submission of requests for a closing agreement, whether an agreement will be entered into is a matter within the Commissioner's sole discretion. For more information, see Voluntary Closing Agreement Process – Employment Tax Issues (VCAP–ET).