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Incorrect State Withholding Tax

One of our employees lives and works in MN. But we incorrectly set up the employee’s work tax area as KS as the employee’s manager works in KS office and we assumed the employee will be working in KS office. Employee never looked at pay check in 2017 nor did the employee look at her W2 in Jan 2018. She contacted us today asking us to issue a W2C ; reimburse her tax expense incase MN taxes is higher and she owes more money to MN.

I did my research and told her that she needs to file a non resident form with KS to zero out the taxable wages and taxes in KS and apply that credit to MN when KS refunds the money.

Do I still have to issue her a W2C and correct our 941s for 2017?


  • acl1118acl1118 ✭✭✭

    If the error is on our side will will make the change. If the employee did not file the proper forms, or lets say they changed their address and didn't advise, we may not make the change. we may file a w2c removing the wages but leave the tax, we will also adjust the wages on the correct state (if needed). This way they will file a return with no wages and should get a refund from the incorrect state. We do not make an additional tax deposit to the corrected state (this will result in penalties to the employer), we make it the responsibility of the employee to work with the state for their error.
    Also keep in mind you may have a SUI reporting issue. Did you report pay to the work state?

  • For state only adjustments do not file a W-2c with the SSA or amend form 941. Follow the individual state instructions for making corrections to the W-2. The only change I would make to the W-2 (or state equivalent) is to change the KS wages to zero and show MN wages. Generally, you cannot change SIT withholding (deposits) after the end of the calendar year - the employee will have to file a KS return to claim a refund and a MN return and pay the tax. The employee owes the tax - if you pay the employee's MN tax (or the shortfall in withholding) that is additional taxable income to the employee. The employee cannot apply the tax paid to KS to MN or take a credit for tax paid to KS as there was no actual tax for KS - only withholding - which the employee gets refunded. The employer may want to reimburse the employee for MN penalties and/or interest - and possibly additional tax prep costs - this may also be additional taxable income to the employee in the year paid.

    The employee can probably do everything without a corrected W-2, but KS may be difficult to convince without documentation from the employer regarding the error. For example, a letter provided to the employee that documents the error and the employee's actual work location. As a tax practitioner, if this were my client, I would prepare the KS and MN returns to reflect the actual situation rather than what is on the W-2 and attach an explanation indicating that the taxpayer did not work or live in KS at anytime during the calendar year.

    MN has a withholding allowance certificate, but MN uses the federal W-4 unless the MN version is required. So, if the employee was not required to submit a MN withholding allowance certificate, the federal W-4 info would be used for MN. It is likely the employee was not required to submit a MN withholding allowance certificate. On the other hand, KS has both a regular certificate K-4 and a non-resident form for allocating wages and withholding where a non-resident works in more than one state. If the employee does not provide a K-4 to the employer, the employer is to withhold at single with zero allowances. If, in the absence of Form K-4, the employer used the federal W-4 allowances (other than single/zero) for KS, the employer made an error. That is, the employer should have solicited a KS withholding allowance certificate.

    Just a note, the employer should provide MN employees with the MN Form just in case the employee is required to use the MN Form even though the Federal W-4 is used for MN purposes in many situations. The employee has to have the opportunity to provide the form where it is required.

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