In emailed advice (Chief Counsel Email 201727008), the IRS Chief Counsel’s office discussed the limitation on the use of Form 941-X, specifically looking at what qualifies as “administrative error” for which the Form 941-X can be used to address issues on prior year’s payroll tax reports related to federal income tax withheld.

People do make mistakes, and at time those errors involve payroll tax issues, including tax withholding. Form 941-X was created to allow employers to deal with some errors—but the form has very specific limitations on its use. As a practical matter, once a year has ended and the employee has been given a W-2, the consequences of, say, overwithholding or underwitholding federal income taxes gets “passed on” to the employee since that number is claimed as a credit on the employee’s own income tax return.

The instructions for Form 941-X provide the following limitation on the use of the form regarding federal income taxes withheld, specifically when the matter concerns such taxes reported on a Form 941 for an earlier year:

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, doesn’t agree with the amount you withheld from an employee’s wages) and errors for which section 3509 rates apply.

The email responds to a request for guidance in processing Forms 941-X where employers are claiming “administrative error” on federal income tax withholding and asking for a refund of overpaid taxes. Employers filing Form 941-X are filing the form, claiming an “administrative error” as the justification for filing the form.

Employers are using Form 941-X to correct federal income tax withheld from an employee in a prior year after an employer discovers that it didn’t withhold the right amount — including because employer incorrectly calculated the amount of federal income tax it paid in a prior year on behalf of the employee, rather than deducting it from the employee’s pay (which resulted in additional wages subject to tax).

The emailed advice agrees with the conclusion of the IRS employee requesting guidance that such items are not “administrative errors” as defined in the instructions. As the email states:

…[O]nly transposition or basic math errors, such as addition-subtraction and multiplication computations, in which the amount reported on Form 941, line 3 (Federal income tax withheld from wages, tips, and other compensation), doesn’t agree with the amount you withheld from an employee’s wages are administrative errors.

Generally, an employer may correct non-administrative errors for federal income tax withholding on an adjusted employment tax return only if the errors are discovered in the same calendar year employer paid the wages. Moreover, for an overcollection, an employer may correct federal income tax withholding only if the employer also repaid or reimbursed the employees in the same year.

The email goes on to note that other prior year errors are not subject to such corrections.

For prior years, an employer may correct federal income tax withholding errors ONLY if they are administrative errors.

If in a subsequent year an employer determines that it incorrectly calculated the amount of tax it withheld in the prior year, the employer can’t correct the federal income tax withholding. The amount of Federal income tax withheld, shown in Box 2 on Form W-2, Wage and Tax Statement, is used by the employee to claim a credit for withholding for individual income tax return purposes.

The email goes on to provide some examples of what does not constitute administrative error for which a Form 941-X can be filed:

Here are a few specific examples of non-administrative errors. If in a subsequent year an employer determines that it incorrectly calculated the amount of tax it withheld in the prior year, the employer can’t correct the federal income tax withholding just because the employer happened to have:

used the wrong income tax withholding table in Pub. 15 or
didn’t treat a payment correctly as taxable or nontaxable or
paid federal income tax on behalf of the employee, rather than deducting it from the employee’s pay (which resulted in additional wages subject to tax).

See § 31.6413(a)-1, § 31.6413(a)-2, and Rev. Rul. 2009-39, 2009-52, I.R.B. 951 at www.irs.gov/irb/2009-52_IRB/ar14.html.