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Apply Payroll Tax Overpayment In QuickBooks


Overpayments are paid at the time of receipt and shall be included as income by the employee. The employee must pay back the gross amount, which is the net amount they received plus any federal or state income taxes if they don’t pay back the advance or overpayment until the following year.


Why you Need to Apply Payroll Tax Overpayment In QuickBooks

Step 1: Determine if the Overpayment is Valid

  • Tax rate entered incorrectly
  • Incorrect tax payment liability period
  • A historical tax payment that was incorrectly reported

The following are examples of valid tax overpayments:

  • Following a tax payment, your tax rate was decreased.
  • After a tax payment was made, one or more paychecks were canceled or deleted.
  • You paid taxes twice during the same responsibility period.

Read Also: QuickBooks Tax Forms

Step 2: Resolve the Overpayment

See what to do if you receive a payroll tax notice if the IRS or your state agency sent you a credit notice for overpaid payroll taxes.

How to Recover Overpaid Payroll Taxes?

Payroll tax calculation requires a significant amount of math. The larger your business, the greater the likelihood that you or your accountants may make a mistake, even if it’s just mistyping a number. Payroll tax recovery will need extra calculations and paperwork if you overpay them.


If you overpay payroll taxes, fill out Form 941-X with the appropriate amounts. Any errors in employee income reported on the W-2 forms also need to be fixed.

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    Calculating Payroll Taxes

    The federal income tax, Social Security, Medicare, as well as any state or local income taxes are all included in this. It is the duty of your business to determine the tax owed for each of your employees, deposit that tax in a different account, and make the required payment to the federal, state, or municipal tax authorities on time. Keep thorough records that prove you followed all regulations.

    Overpayments and Repayments in the Current Year

    Overpayments are considered paid when they are received and must be reported as income by the employee. When completing the W-2, the employer should not include the amount if the employee repays the advance or overpayment in the same year that they got it.

    The employee must pay back the difference, and the employer must file the appropriate updated federal and state returns. In these situations, it’s also crucial to keep an eye on state and federal unemployment rates because they could be exaggerated. If this happens, amendments may need to be filed for the affected quarters.

    Overpayments and Repayments in Subsequent Years

    When an overpayment isn’t reimbursed until the following year, things become a little trickier. This frequently occurs when sign-on bonuses that must be reimbursed are involved. Again, overpayments are regarded as paid at the time of receipt and must be reported as income by the employee.

    The employee must pay back the gross amount, which is the net amount they received plus any federal or state income taxes if they don’t pay back the advance or overpayment until the following year. There can be no adjustment for income taxes withheld since the employer cannot collect federal or state income tax that was deducted in a previous year. However, the employee may deduct the tax they repaid on their personal income tax return.

    By submitting a 941X, the employer can typically recover the Social Security taxes they remitted on the overpayment. They must also submit a W-2C that details the reduced pay and taxes collected for Social Security and Medicare. If the worker exceeds the FICA cap, there is an exception to this rule. 

    Read This: Sign 941 Form in QuickBooks

    Social Security Cannot be Recovered by the Employer

    1. Select Taxes from the left pane.
    2. Choose Payroll Tax.
    3. Click Pay Taxes under Taxes.
    4. Locate the tax name under TAX TYPE on the Pay Taxes page.
    5. On that page, a negative value denotes an overpayment.
    6. Resolve Overpayment by clicking.
    7. Choose to Apply to an upcoming tax payment (recommended).
    8. Then select Mark as Resolved.

    How do I Record Payroll Tax Overpayment in QuickBooks?

    • Improved Intuit Online Payroll
    • Navigate to Taxes & Forms.
    • To check the overpayment, choose Pay Taxes from the Taxes section. Negative values represent overpayments.
    • Next to the negative amount, click Resolve Overpayment. You will be able to see how the taxes are broken down.
    • If appropriate, choose: Choose Save.

    Use Form 941 to submit payroll taxes. Even if you have no taxes to declare, you must send in a new form every three months after the first one.

    The IRS has Set four Tax Filing Deadlines:

    • April 30 for January through March.
    • For April through June, July 31.
    • For July through September, October 31.
    • October 31 to December 31 of the following year.

    In addition to wages and salaries, you must also disclose bonuses, tips, and other payroll expenses. You don’t record non-payroll payments like pensions or unemployment compensation using form 941. According to federal law, you are permitted to modify your payment by claiming write-offs, like an employee-retention credit. Even a medium-sized company can have enough complexity to warrant engaging an accountant.

    If the accountant makes a mistake, though, you’re the one responsible. But if the accountant makes a mistake, you’re the one who must pay for it.

    Frequently Asked Questions

    1. How do I correct a payroll overpayment?

      Create a deduction that holds back the employee’s portion of the overpayment. Include that deduction in the subsequent payroll after that. Enter a negative manual check for the pay code and for the deductions after processing the payroll along with this deduction to fix the employee summary data.

    2. How do I correct a payroll overpayment in a prior year and QuickBooks online?

      To appear on the employee’s current W-2, an overpayment must be repaid during the same tax year. For the purpose of recovering the social security and Medicare taxes, repayment for salaries received inadvertently in a former year must be reported on Form 941X.

      Add the new deduction payroll item to a paycheck for the overpaid employee, then enter the amount of the overpayment. The deduction item must be added to a paycheck with equal or more earnings than the amount that will be deducted, as QuickBooks can’t create a paycheck with a negative net pay.

      To a paycheck for the employee who was overpaid, add the new deduction payroll item, then enter the overpayment’s amount. As QuickBooks cannot generate a paycheck with a negative net pay, the deduction item must be included in a paycheck with earnings equal to or greater than the amount that would be withheld.

    3. How do I record an overpayment on 941 in QuickBooks?

      Use Form 941 to Request the Credit
      To override, choose the right click on the number. Type the updated amount. The form modifies the overall balance owed or the amount of overpayment. If there is an overpayment, choose to Apply to the next return on line 15 of the form if you want to apply it to the following return.

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