It is not uncommon for employers to over withhold Additional Medicare Taxes from employee wages and therefore must issue a refund to that employee. The IRS has issued formal guidelines for this scenario. Depending on the timing of discovery, there are various actions that must be taken.
Discovery in the Same Quarter
If the over-withholding is discovered before the employer files Form 941 for the quarter when the error was made, and if the employer returns the amount over-collected to the employee before that Form 941 is due, then the employer does not have to report the over-withheld amount on Form 941. However, the employer must keep detailed records of the repayment to the employee.
Discovery in Different Quarter, but the Same Calendar Year
If the over-withholding is discovered after the employer files Form 941 for the quarter when the error was made, but is still within the same calendar year as the error was made, the employer can still return the amount over-collected to the employee. Again, the employer must keep detailed records of the repayment to the employee, and the repayment must be made before the end of the calendar year when the error was made.
Repaying the Employee
If employers repay over-collected Additional Medicare tax by reducing future tax withholdings, it must be done within the same calendar year as the over-collection occurred. Detailed records of the repayments must be kept.
Form 941-X allows employers to report an interest-free adjustment for overpayment of Additional Medicare Tax after the employer discovers the over-collection and repays the employee in the same calendar year that the error occurred. On Form 941-X, employers may report that employees have been repaid for Additional Medicare Tax over-collected, as well as reporting both employee and employer portions of Additional Medicare Tax.
Employers can file claims for refunds for Additional Medicare Tax that was overpaid to the IRS but not withheld from the employee. Refunds of overpayments can be claimed by employees who file Form 8959, Additional Medicare Tax, or with Form 1040. If the error is discovered after the employee’s personal Form 1040 is filed, the employee should file an amended Form 1040X to claim the refund.
For more information, visit the IRS website to view Questions and Answers for the Addional Medicare Tax or Payroll Software is able to process changes due to the Affordable Care Act.