If you receive a letter from the SSA or the IRS referring to discrepancies in Income tax, Social Security, and Medicare tax amounts reported on 941s and W-2s, what does it mean and what should you do?
The letter typically includes a table, listing Federal income tax withholding, Social Security tax withholding, and Medicare tax withholding for the company. The table will show differences between the amounts reported to the IRS and the SSA and require the company to reconcile the records.
To understand the letter and take proper action to reconcile, you need to understand how the information is reported and shared among employers, employees, the SSA, and the IRS. As an employer, the company is required to
- withhold employee taxes from every paycheck,
- pay/deposit payroll taxes, including employer’s portion, to the IRS in time and
- file employee payroll reports to the IRS and the SSA.
A company is normally required to file employee payroll Form 941 every quarter to the IRS to report total employee payroll wages paid, Social Security taxes, and Medicare Taxes for the quarter. Form 941 is due in the month after the quarter ends (April, July, October, and January respectively).
At the end of the year, the company needs to issue W-2s to employees that summarizes the total employee payroll wage and taxes. The company also needs to file the W-2s to the SSA. The SSA will process the W-2 information then forward the information to the IRS (Company does not file W-2s to the IRS).
The employee then uses the W-2 form to prepare and file income tax return (Form 1040) to the IRS before 4/15 each year.
The most important concept in the whole process is that all numbers need to match.
- Total of W-2s = Sum of quarterly Form 941s (4 quarters)
- The income reported on Form 1040 = W-2 data reported to the SSA, then the IRS
If the W-2s total does not equal that of the 941s, the company will get a letter from either the IRS or the SSA requesting to reconcile/correct the amounts. If the employee income on Form 1040 does not equal what was reported to the IRS through SSA, the employee will receive a letter from the IRS.
If your company receives a letter from the IRS or the SSA requesting reconciliation, your process may have broken down and you need to know which information is accurate and how to correct them.
- If the W-2s were wrong, the company needs to prepare and file Form W-2C (W-2 correction form) to correct the information to the SSA and issue W-2C form to the employee if required.
- If Form 941 was wrong, the company needs to prepare and file a Form 941X to make corrections.
Once the reports are reconciled, the next step is to make sure all employee payroll taxes are paid correctly. Eventually, all employee payroll reports and tax payments need to reconcile to ensure the correct payroll records.
In summary, if your company received a letter from the IRS or the SSA requesting payroll record reconciliation, you should gather your form 941s and W-2s, recalculate and sum up the totals. Compare the amounts with the amounts in the letter, identify the cause of discrepancy and file the corrections accordingly. Of course, you need to remember that the employee payroll tax payments need to be reconciled as well.