Overwithheld Taxes – How to Adjust Withholding Tax

If an employee notifies you that there were over withheld taxes in their payroll check, a correction to adjust withholding tax may need to be made. Or you may discover that some taxes were incorrectly under-withheld. Every employee will have withholding taxes withheld from their paycheck. However, over withheld taxes means the IRS is getting more than is due. Underwithheld tax means dealing with government notices and penalties. This could happen if an employee was set up in QuickBooks® software incorrectly (ie: wrong number of exemptions or no social security withholding or incorrect state taxes assigned). The employee may tell you he needs to increase/decrease his number of exemptions. Below we give you the reports you need to determine if an error exists and provide help on how to adjust withholding tax.

Adjust Withholding Tax for Federal or State Taxes

This QuickBooks® payroll tip shows the procedure to adjust the withholding tax. There are several ways to make a change. Any adjustment you create to withholding taxes may need a similar adjustment to the wage base that will show up in the W-2.

An example of a withholding error is when an employee has no or incorrect withholding amounts of social security tax (6.2% of gross up to the wage limit).

Step one is to print a W-2 for the employee whom you identified as having incorrect withholding tax. You can print a W-2 to plain paper as many times as needed throughout the year. Printing a W-2 does not “set the balances”. With each additional paycheck during the year, the W-2 will continue to update. The W-2 will help you identify which balances are currently incorrect.

First Print a W2 Tax Form

  1. Go to Employee menu > Process Forms > W2
  2. Select one employee who needs a withholding tax adjustment
  3. Print W-2

Run a Payroll summary report (year to date)

  1. Find the employee whose W-2 you just printed
  2. Drill down on the social security, employee year to date amount
  3. Print the resulting transactions by payroll item report

Review the W-2 for wage amounts. Do the correct amounts appear in the Social Security and Medicare wages? Do the correct deductions appear in box 12 for any benefit plan that needs reporting? Is there a problem with under or over withheld taxes? You may see that it will be necessary to adjust withholding tax to the wage base, as well. We offer QuickBooks® payroll support and assistance if you need help identifying and fixing any errors Call 800-216-0763.

How to adjust withholding tax in QuickBooks® software

  • When you discover the error before year-end it may be possible to make an adjustment to the wage base and let QuickBooks® software do the rest by self-adjusting subsequent payroll checks


  • If the year is over and you need to make corrections to the 4th quarter and the W2 Form: make an adjustment to the wage base and withholding amount posting the difference to employee loans (another current asset account). If necessary you can issue a refund check to your employees if the tax was over withheld.

Additionally, if you are affecting the accounts and making changes to FICA and Medicare Employee; you may need to adjust Company Paid Medicare and FICA. Below we describe how to make these adjustments in detail.


Using the payroll Liability Window to correct over withholding or under-withholding

If your employee’s taxes are over withheld or under withheld you can correct the wage base in the adjust payroll liability window. If there are still payrolls left in the quarter or year, QuickBooks® will calculate the necessary adjustments to withholding in the next payroll check issued.

  1. Under the Employees menu, choose Process Payroll Liabilities, then choose Adjust Payroll Liabilities.
  2. In the Effective Date field, enter the last day of the quarter when the tax discrepancy occurred.
  3. Select the Employee option button and choose the employee whose tax liabilities you want to adjust.
  4. In the Item Name field, choose the payroll item you want to adjust.
  5. Click the button accounts affected
    • Will not affect your account balances, if you have done either of the following:
      • Previously used a general journal entry to adjust your liability for one or more payroll items
      • Paid your payroll liabilities with the Write Checks window
    • Does affect your account balances
      • Most likely you do want to affect account balances in order to adjust the payroll liability account and possibly the payroll tax expense for the employer share of taxes
  6. In the Item Name field, choose the payroll item you would like to adjust.
QuickBooks Liability Adjustment Window used to adjust withholding tax. Overwithheld taxes should be corrected.

Within QuickBooks® software, use this window to adjust withholding tax on employee payroll.



Make a one-time adjustment to the employee’s wage base

Subtract the actual amount withheld from the amount you should have withheld. Enter the difference in the amount field. The amount will be negative if you want to decrease the employee’s liability for the tax. Likewise, if the difference in tax is negative, the difference in wage base should be negative.

Click OK and ignore warnings about creating a paycheck.

You can see the effect of your change by reprinting the W-2 and payroll summary report. Drill down on the tax items to make sure the wage base and withholding are now corrected




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