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IRS.gov Website
Publication 15
taxmap/pubs/p15-012.htm#en_us_publink1000202514

13. Reporting Adjustments to Form 941 or Form 944(p32)

rule
taxmap/pubs/p15-012.htm#en_us_publink1000202516

Current Period Adjustments(p32)

rule
In certain cases, amounts reported as social security and Medicare taxes on Form 941, lines 5a–5d, column 2 (Form 944, lines 4a–4c, column 2), must be adjusted to arrive at your correct tax liability (for example, excluding amounts withheld by a third-party payor or amounts you were not required to withhold). Current period adjustments are reported on Form 941, lines 7–9, or Form 944, line 6, and include the following types of adjustments.
taxmap/pubs/p15-012.htm#en_us_publink1000253572

Fractions-of-cents adjustment.(p32)

rule
If there is a small difference between total taxes after adjustments (Form 941, line 10; Form 944, line 7) and total deposits (Form 941, line 13; Form 944, line 10), it may have been caused, all or in part, by rounding to the nearest cent each time you computed payroll. This rounding occurs when you figure the amount of social security and Medicare tax to be withheld and deposited from each employee's wages. The IRS refers to rounding differences relating to employee withholding of social security and Medicare taxes as "fractions-of-cents" adjustments. If you pay your taxes with Form 941 (or Form 944) instead of making deposits because your total taxes for the quarter (year for Form 944) are less than $2,500, you also may report a fractions-of-cents adjustment.
To determine if you have a fractions-of-cents adjustment for 2013, multiply the total wages and tips for the quarter subject to: Compare these amounts (the employee share of social security and Medicare taxes) with the total social security and Medicare taxes actually withheld from employees for the quarter (from your payroll records). The difference, positive or negative, is your fractions-of-cents adjustment to be reported on Form 941, line 7, or Form 944, line 6. If the actual amount withheld is less, report a negative adjustment using a minus sign (if possible, otherwise use parentheses) in the entry space. If the actual amount is more, report a positive adjustment.
Deposit
For the above adjustments, prepare and retain a brief supporting statement explaining the nature and amount of each. Do not attach the statement to Form 941 or Form 944.
taxmap/pubs/p15-012.htm#en_us_publink1000253574

Example. (p32)

Cedar, Inc. was entitled to the following current period adjustments.
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Adjustment of tax on third-party sick pay.(p32)

rule
Report both the employer and employee shares of social security and Medicare taxes for sick pay on Form 941, lines 5a and 5c (Form 944, lines 4a and 4c). If the aggregate wages paid for an employee by the employer and third-party payor exceed $200,000 for the calendar year, report the Additional Medicare Tax on Form 941, line 5d. Show as a negative adjustment on Form 941, line 8 (Form 944, line 6), the social security and Medicare taxes withheld on sick pay by a third-party payor. See section 6 of Publication 15-A for more information.
taxmap/pubs/p15-012.htm#en_us_publink1000202517

Adjustment of tax on tips.(p33)

rule
If, by the 10th of the month after the month you received an employee's report on tips, you do not have enough employee funds available to withhold the employee's share of social security and Medicare taxes, you no longer have to collect it. However, report the entire amount of these tips on Form 941, lines 5b and 5c (Form 944, lines 4b and 4c). If the aggregate wages and tips paid for an employee exceed $200,000 for the calendar year, report the Additional Medicare Tax on Form 941, line 5d. Include as a negative adjustment on Form 941, line 9 (Form 944, line 6), the total uncollected employee share of the social security and Medicare taxes.
taxmap/pubs/p15-012.htm#en_us_publink1000202518

Adjustment of tax on group-term life insurance premiums paid for former employees.(p33)

rule
The employee share of social security and Medicare taxes for premiums on group-term life insurance over $50,000 for a former employee is paid by the former employee with his or her tax return and is not collected by the employer. However, include all social security and Medicare taxes for such coverage on Form 941, lines 5a and 5c (Form 944, lines 4a and 4c). If the amount paid for an employee for premiums on group-term life insurance combined with other wages exceeds $200,000 for the calendar year, report the Additional Medicare Tax on Form 941, line 5d. Back out the amount of the employee share of these taxes as a negative adjustment on Form 941, line 9 (Form 944, line 6). See Publication 15-B for more information on group-term life insurance.
taxmap/pubs/p15-012.htm#en_us_publink1000202525

No change to record of federal tax liability.(p33)

rule
Do not make any changes to your record of federal tax liability reported on Form 941, line 16, or Schedule B (Form 941) (Form 945-A for Form 944 filers) for current period adjustments. The amounts reported on the record reflect the actual amounts you withheld from employees' wages for social security and Medicare taxes. Because the current period adjustments make the amounts reported on Form 941, lines 5a–5d, column 2 (Form 944, lines 4a–4c, column 2), equal the actual amounts you withheld (the amounts reported on the record), no additional changes to the record of federal tax liability are necessary for these adjustments.
taxmap/pubs/p15-012.htm#en_us_publink1000202526

Prior Period Adjustments(p33)

rule
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Forms for prior period adjustments.(p33)

rule
The Internal Revenue Service has developed Form 941-X and Form 944-X to replace Form 941c, Supporting Statement to Correct Information. There are also Forms 943-X, 945-X, and CT-1X to report corrections on the corresponding returns.
Form 941-X and Form 944-X also replace Form 843, Claim for Refund or Request for Abatement, for employers to request a refund or abatement of overreported employment taxes. Continue to use Form 843 when requesting a refund or abatement of assessed interest or penalties.
Deposit
See Revenue Ruling 2009-39, 2009-52 I.R.B. 951, for examples of how the interest-free adjustment and claim for refund rules apply in 10 different situations. You can find Revenue Ruling 2009-39, at www.irs.gov/irb/2009-52_IRB/ar14.html.
taxmap/pubs/p15-012.htm#en_us_publink1000202528

Background.(p33)

rule
Treasury Decision 9405 changed the process for making interest-free adjustments to employment taxes reported on Form 941 and Form 944 and for filing a claim for refund of employment taxes. Treasury Decision 9405, 2008-32 I.R.B. 293, is available at www.irs.gov/irb/2008-32_irb/ar13.html. You will use the adjustment process if you underreported employment taxes and are making a payment, or if you overreported employment taxes and will be applying the credit to the Form 941 or Form 944 period during which you file Form 941-X or Form 944-X. You will use the claim process if you overreported employment taxes and are requesting a refund or abatement of the overreported amount. We use the terms "correct" and "corrections" to include interest-free adjustments under sections 6205 and 6413, and claims for refund and abatement under sections 6402, 6414, and 6404 of the Internal Revenue Code.
taxmap/pubs/p15-012.htm#en_us_publink1000202529

Correcting employment taxes.(p33)

rule
When you discover an error on a previously filed Form 941 or Form 944, you must:
Continue to report current quarter adjustments for fractions of cents, third-party sick pay, tips, and group-term life insurance on Form 941 using lines 7–9, and on Form 944 using line 6.
Report the correction of underreported and overreported amounts for the same tax period on a single Form 941-X or Form 944-X unless you are requesting a refund. If you are requesting a refund and are correcting both underreported and overreported amounts, file one Form 941-X or Form 944-X correcting the underreported amounts only and a second Form 941-X or Form 944-X correcting the overreported amounts.
See the chart on the back of Form 941-X or Form 944-X for help in choosing whether to use the adjustment process or the claim process. See the Instructions for Form 941-X or the Instructions for Form 944-X for details on how to make the adjustment or claim for refund or abatement.
taxmap/pubs/p15-012.htm#en_us_publink1000202530

Income tax withholding adjustments.(p33)

rule
In a current calendar year, correct prior quarter income tax withholding errors by making the correction on Form 941-X when you discover the error.
You may make an adjustment only to correct income tax withholding errors discovered during the same calendar year in which you paid the wages. This is because the employee uses the amount shown on Form W-2 as a credit when filing his or her income tax return (Form 1040, etc.).
You cannot adjust amounts reported as income tax withheld in a prior calendar year unless it is to correct an administrative error or section 3509 applies. An administrative error occurs if the amount you entered on Form 941 or Form 944 is not the amount you actually withheld. For example, if the total income tax actually withheld was incorrectly reported on Form 941 or Form 944 due to a mathematical or transposition error, this would be an administrative error. The administrative error adjustment corrects the amount reported on Form 941 or Form 944 to agree with the amount actually withheld from employees and reported on their Forms W-2.
taxmap/pubs/p15-012.htm#en_us_publink1000286685

Additional Medicare Tax withholding adjustments.(p34)

rule
Generally, the rules discussed above under Income tax withholding adjustments apply to Additional Medicare Tax withholding adjustments. That is, you may make an adjustment only to correct Additional Medicare Tax withholding errors discovered during the same calendar year in which you paid wages. You should not adjust amounts reported in a prior calendar year unless it is to correct an administrative error or section 3509 applies. If you have overpaid Additional Medicare Tax, you should not file a claim for refund for the amount of the overpayment unless the amount was not actually withheld from the employee's wages.
taxmap/pubs/p15-012.htm#en_us_publink1000202531

Collecting underwithheld taxes from employees.(p34)

rule
If you withheld no income, social security, or Medicare taxes or less than the correct amount from an employee's wages, you can make it up from later pay to that employee. But you are the one who owes the underpayment. Reimbursement is a matter for settlement between you and the employee. Underwithheld income tax must be recovered from the employee on or before the last day of the calendar year. There are special rules for tax on tips (see section 6) and fringe benefits (see section 5).
taxmap/pubs/p15-012.htm#en_us_publink1000202534

Refunding amounts incorrectly withheld from employees.(p34)

rule
If you withheld more than the correct amount of income, social security, or Medicare taxes from wages paid, repay or reimburse the employee the excess. Any excess income tax or Additional Medicare Tax withholding should be repaid or reimbursed to the employee before the end of the calendar year in which it was withheld. Keep in your records the employee's written receipt showing the date and amount of the repayment or record of reimbursement. If you did not repay or reimburse the employee, you must report and pay each excess amount when you file Form 941 for the quarter (or Form 944 for the year) in which you withheld too much tax.
taxmap/pubs/p15-012.htm#en_us_publink1000202535

Correcting filed Forms W-2 and W-3.(p34)

rule
When adjustments are made to correct wages and social security and Medicare taxes because of a change in the wage totals reported for a previous year, you also need to file Form W-2c and Form W-3c with the SSA. Up to five Forms W-2c per Form W-3c may now be filed per session over the Internet, with no limit on the number of sessions. For more information, visit the Social Security Administration's Employer W-2 Filing Instructions & Information webpage at www.socialsecurity.gov/employer.
taxmap/pubs/p15-012.htm#en_us_publink1000202536

Exceptions to interest-free corrections of employment taxes.(p34)

rule
A correction will not be eligible for interest-free treatment if:
A correction will not be eligible for interest-free treatment after the earlier of the following:
taxmap/pubs/p15-012.htm#en_us_publink1000202537

Wage Repayments(p34)

rule
If an employee repays you for wages received in error, do not offset the repayments against current-year wages unless the repayments are for amounts received in error in the current year.
taxmap/pubs/p15-012.htm#en_us_publink1000202538

Repayment of current year wages.(p34)

rule
If you receive repayments for wages paid during a prior quarter in the current year, report adjustments on Form 941-X to recover income tax withholding and social security and Medicare taxes for the repaid wages.
taxmap/pubs/p15-012.htm#en_us_publink1000202539

Repayment of prior year wages.(p34)

rule
If you receive repayments for wages paid during a prior year, report an adjustment on Form 941-X or Form 944-X to recover the social security and Medicare taxes. You should not make an adjustment for income tax or Additional Medicare Tax withholding because the wages were wages and income to the employee for the prior year.
You also must file Forms W-2c and W-3c with the SSA to correct social security and Medicare wages and taxes. Do not correct wages (box 1) on Form W-2c for the amount paid in error. Give a copy of Form W-2c to the employee.
taxmap/pubs/p15-012.htm#en_us_publink1000202540
Employee reporting of repayment.(p34)
The wages paid in error in the prior year remain taxable to the employee for that year. This is because the employee received and had use of those funds during that year. The employee is not entitled to file an amended return (Form 1040X) to recover the income tax on these wages. Instead, the employee is entitled to a deduction (or credit in some cases) for the repaid wages on his or her income tax return for the year of repayment.