Wage Repayments

If an employee repays you for wages received in error, don’t offset the repayments against current year wages unless the repayments are for amounts received in error in the current year.

Repayment of current-year wages.

If you receive repayments for wages paid during a prior quarter in the current year, report adjustments on Form 941-X to recover income tax withholding and social security and Medicare taxes for the repaid wages.

Repayment of prior-year wages.

If you receive repayments for wages paid during a prior year, report an adjustment on Form 941-X, Form 943-X, or Form 944-X to recover the social security and Medicare taxes. You can’t make an adjustment for income tax withholding because the wages were income to the employee for the prior year. You can’t make an adjustment for Additional Medicare Tax withholding because the employee determines liability for Additional Medicare Tax on the employee’s income tax return for the prior year.

You must also file Forms W-2c and W-3c with the SSA to correct social security and Medicare wages and taxes. Don’t correct wages (box 1) on Form W-2c for the amount paid in error. Give a copy of Form W-2c to the employee.

Employee reporting of repayment.

The wages paid in error in the prior year remain taxable to the employee for that year. This is because the employee received and had use of those funds during that year. The employee isn’t entitled to file an amended return (Form 1040-X) to recover the income tax on these wages. Instead, the employee may be entitled to a deduction or credit for the repaid wages on their income tax return for the year of repayment. However, the employee should file an amended return (Form 1040-X) to recover any Additional Medicare Tax paid on the wages paid in error in the prior year. If an employee asks about reporting their wage repayment, you may tell the employee to see Repayments in Pub. 525, Taxable and Nontaxable Income, for more information.