How to manually correct the employee history after a deduction has been processed through a pay run as 'subject' to federal and state taxes incorrectly resulting in over withheld tax amounts

If an employee receives a paycheck that did not have the correct taxes withheld, you must correct the employee history. This article describes how to manually correct the employee history after a deduction has been processed through a pay run with the incorrect tax markings for federal and state taxes.

Applies to:   Microsoft Dynamics GP
Original KB number:   929600

More information

If the following conditions are true in the employee history, you must make manual adjustments to the employee history:

• A deduction is marked subject to taxes.
• The deduction should have been tax-sheltered from federal and state taxes.

Resolution

To correct the employee history, you must manually calculate the taxes that must be paid back to the employee. Then, you must process the paycheck through a pay run against an expense account pay code. Then you must process manual adjustments to update the withholding amounts and taxable wages.

• Step 1 - Manually calculate the taxes that must be paid back to the employee

• Step 2 - How to reimburse an employee for taxes that were incorrectly deducted

  1. Select Tools, point to Setup, point to Payroll, and then select Pay Code.
  2. In the Pay Code Setup window, set up a new expense account pay code. In the Description field, type a description, and then select Business Expense in the Pay Type list. Make sure that the Report as Wages check box is not selected, and then select Save.
  3. Select Cards, point to Payroll, and then select Pay Code.
  4. Assign this new pay code to the employees that you want to reimburse.
  5. In the Pay Rate box, type the total federal and state taxes that you want to reimburse to the employee.
  6. Select Save.
  7. Select Transactions, point to Payroll, and then select Transaction Entry.
  8. In the Batch ID field, enter a batch ID.
  9. Enter a transaction for each employee that you want to reimburse.
  10. In the Code list, select the expense account pay code that you created in step 2. By default, the amount that appears in the Amount field is the amount that you typed in step 5.
  11. Process the payroll batch that you created in step 8, and then select Post.

• Step 3 - How to create a transaction to decrease the federal tax withheld and the federal taxable wages

  1. Select Transactions, point to Payroll, and then select Manual Checks.
  2. In the Payroll Manual Check-Adjustment Entry window, leave the Batch ID field blank. In the Checkbook ID field, type the checkbook ID, and then type the check number in the Check Number field.
  3. In the Check Date field, type a date. This date is used to update month-to-date and year-to-date fields throughout the Payroll module.
  4. In the Posted Date field, type a date. This date is used to update the General Ledger module.
  5. Type the Employee ID in the Employee ID field.
  6. Select Transactions.
  7. In the Transaction Type list, select Federal Tax.
  8. In the Amount box, type the federal taxes to be reduced. Type the amount as a negative amount.
  9. In the Taxable Wage box, type the federal taxable wages to be reduced. Type the amount as a negative amount, and then select Save.
  10. Close the window.
  11. Select Save when you are prompted to save changes to this transaction.
  12. Select Post. When you are prompted to print reports, select a destination, and then close the Payroll Manual Check-Adjustment Entry window.
  13. Repeat step 1 though step 12 for each employee you want to adjust.

• Step 4 - How to create a transaction that decreases the state tax withheld and the state taxable wages

  1. Select Transactions, point to Payroll, and then select Manual Checks.
  2. In the Payroll Manual Check-Adjustment Entry window, leave the Batch ID field blank. In the Checkbook ID field, type the checkbook ID, and then type the check number in the Check Number field.
  3. In the Check Date field, type a date. This date is used to update month-to-date and year-to-date fields throughout the Payroll module.
  4. In the Posted Date field, type a date. This date is used to update the General Ledger module.
  5. Type the Employee ID in the Employee ID field.
  6. Select Transactions.
  7. In the Transaction Type list, select State Tax.
  8. In the Code list, select the appropriate state tax code.
  9. In the Amount box, type the state taxes to be reduced. Type the amount as a negative amount.
  10. In the Taxable Wage box, type the state taxable wages to be reduced. Type the amount as a negative amount, and then select Save.
  11. Close the window.
  12. Select Save when you are prompted to save changes to this transaction.
  13. Select Post. When you are prompted to print reports, select a destination, and then close the Payroll Manual Check-Adjustment Entry window.
  14. Repeat step 1 through step 13 for each employee that you want to adjust.

Optional Steps

Verify the General Ledger accounts that are affected, and then make adjusting entries if it is required. The Net Wages field will be overstated by the expense account pay code. This field is informational and can be manually edited in the Employee Summary window. To do this, follow these steps:

1. On the Tools menu, point to Setup, point to Payroll, and then select Payroll.
2. In the Payroll Setup window, select Options.
3. In the Options area, make sure that the Edit Financial Fields check box is selected.
4. Select OK two times.
5. Select Cards, point to Payroll, and then select Summary.
6. In the Employee list, select the employee ID, and then type the year in the Year field.
7. In the Net Wages field, type the correct amount, and then select Save.

For more information, also see the steps in How to correct over-withholding of employee payroll taxes in Microsoft Dynamics GP.