In a response to Representative Jeff Miller (R-FL), the Internal Revenue Service (IRS), in Information Letter 2010-0010, outlines the process to use after the close of the payroll tax year to correct errors that result in overwithholding of federal payroll taxes. The ability to correct such errors depends on when the errors are discovered and the type of tax that was overwithheld.
An employer may correct an error of overwithholding of Federal Insurance Contributions Act (FICA) tax within the statute of limitations for such taxes by using Form 941-X, Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund, to claim a refund or make an interest-free adjustment.
An employer can correct an overpayment of income tax withholding using either the interest-free adjustment process or the claim for refund process. “An interest-free adjustment for an overcollection of income tax withholding can only be made if the employer discovers the error and repays or reimburses the employee within the same calendar year as the payment of the wages.” Notwithstanding this rule, an overpayment due to an administrative error may be corrected after the calendar year. The claim for refund process is available only “if the employer did not actually withhold the amount from the employee.”