Payroll in Practice: 4.28.2025

Question: An LLC classed as a spousal partnership employs the owners’ children. The IRS notified the LLC to use Form 944, Employer’s Annual Federal Tax Return, for its payroll reporting. During 2024, the oldest child turned 18. Although income tax was withheld and reported on Form 944, the owners did not realize that the child was no longer exempt from Social Security and Medicare taxation and failed to report and pay those taxes. The oversight was eventually discovered in March while preparing the partnership return. How should this be corrected?

Answer: Errors on a previously filed Form 944 are corrected using Form 944-X, Adjusted Employer’s Annual Federal Tax Return or Claim for Refund. Form W-2, Wage and Tax Statement, will also have to be corrected using Form W-2c, Corrected Wage and Tax Statement.

An employer that has underreported and underpaid employment tax with respect to any wage payment can correct the error with an interest-free adjustment if the error is discovered after the return reporting the wages has been filed. However, if the error can be corrected before the original return is filed, the correction must be made on the original return.

An interest-free adjustment applies if a payroll tax error is corrected timely and any unpaid tax is paid by the time the correcting return is filed. A correction is considered timely if it is made within the return period in which the error was discovered. For this purpose, an error is considered discovered when the employer has all the information necessary to correct it.

The return period for Form 944 is the calendar year. The due date for filing a correction is the same as the due date for the return corresponding to the period in which the error is discovered. In this case, the error was discovered in 2025 after the 2024 Form 944 was filed. The due date for the 2025 Form 944 is Feb. 2, 2026, because Jan. 31, 2026, is a Saturday. So, the correction will be timely if it is made and the tax is paid by Feb. 2, 2026.

Form 944-X is used to make the correction, through which the partnership will report additional Social Security and Medicare wages and taxes. For the tax deposit to be timely, the additional amount due must be deposited by the time the related Form 944-X is filed. For example, if the error was discovered on March 28, 2025, and the correction is filed April 8, 2025, the additional tax must be deposited on or before April 8, 2025.

The 2024 Form W-2 should also be corrected by preparing a Form W-2c and filing it with the SSA. Appropriate copies must be provided to the employee. While this change should not affect any state information on the form, state rules regarding Form W-2 corrections should be followed.

For this case, there should no penalty for late filing or late furnishing of a corrected Form W-2. The penalty exception for a de minimis number of corrections for the 2024 calendar year should apply. Under this exception, penalties will not apply to the greater of 10 forms or 0.5% of the total number of forms filed. The original forms must have been filed timely and contain incorrect or incomplete information. The corrections must be made before Aug. 1, 2025, although a reasonable-cause exception may still apply if the correction is made later. If the correction is made after Aug. 1, a reasonable cause exception may still apply.

The unwithheld employee share of the Social Security and Medicare taxes constitutes an overpayment of net pay, but not of gross wages. The employee should reimburse the employer for the taxes the employer paid on their behalf when making the correction.

If the employer is not reimbursed, it will have paid the employee’s taxes. This payment is considered additional compensation for the employee for the year the taxes are paid. For example, if the additional tax is paid in 2025 and not recovered from the employee, the amount paid is included in the employee’s 2025 wages. The employer should either withhold the related tax from other wages or gross up the taxes on the amount paid for the employee.

Regardless of whether the employer recovers the tax it paid for the correction, the employee’s gross wages for 2024 remain the same. Everything related to the error is to be reported on the 2024 Form 944 and Form 944-X. As long as the employee repays the amount the employer paid on their behalf, the error has no effect on 2025 payroll or the 2025 Form 944.

The correction should be made as soon as possible. An employer may file additional Forms 944-X if additional errors for 2024 are discovered later.

This column does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., or its owners.

Author Information
Patrick Haggerty is the owner of a tax practice in Chapel Hill, North Carolina, and an enrolled agent licensed to practice before the Internal Revenue Service. The author may be contacted at phaggerty@prodigy.net.

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