Prior-year withholding corrections are limited to administrative errors

Plain-English summary

Chief Counsel clarified when an employer may use Form 941-X to correct federal income tax withholding from a prior year. An administrative error is limited to a transposition or basic mathematical mistake that caused the tax reported on Form 941 to differ from the amount actually withheld from employees. Using the wrong withholding table, misclassifying a payment as taxable or nontaxable, or incorrectly grossing up wages when the employer paid the employee's tax are not administrative errors. Those non-administrative errors generally may be corrected only when discovered in the same calendar year the wages were paid, and an overcollection also requires repayment or reimbursement to employees in that year. In a later year, the employer cannot revise the withholding merely because it calculated the amount incorrectly, since the Form W-2 amount is used by the employee to claim a withholding credit.

Ruling snapshot

• Question: What qualifies as an administrative error that permits a prior-year federal income tax withholding correction on Form 941-X?
• Outcome: advice given
• Key authorities: Treas. Reg. §§ 31.6413(a)-1 and 31.6413(a)-2; Rev. Rul. 2009-39

Full text (IRS public release)

ID: CCA_2017062615343043
UILC: 641.00-00

Number: 201727008
Release Date: 7/7/2017
From:
Sent: Monday, June 26, 2017 3:34:30 PM
To:
Cc:
Bcc:
Subject: “administrative error” in Instructions for Form 941-X

You asked for a clarification on the definition of “administrative error” as used in the
Instructions for Form 941-X.

You indicated that employers are filing Form 941-X to correct federal income tax withheld in
prior years, and stating “administrative error” on line 24 as the explanation for the correction
and seeking a refund when it appears the reason is actually non-administrative. 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).

We agree with your conclusion – only 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.

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.

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. For more details on how to complete Form 941-X to
correct an administrative error, please go to “Correcting federal income tax withheld” under
Reminders in the Instructions for Form 941-X at https://www.irs.gov/pub/irs-pdf/i941x.pdf