Accounting & Bookkeeping & Small Business Forum

[cfhamman]

A sole proprietor was mistakenly paid as an employee for 3 months (2nd quarter), paying/withholding employment taxes for federal and state withholding & unemployment and social security taxes. At year end, should a W-2 be sent for the 3 month period? Should IRS & State be notified of the error in order to credit employment taxes withheld by mistake? What else needs to be corrected?

[dp1903]

I can't answer your question fully without doing research on how to handle such an error with the IRS and state. If you call them and explain the situation, they will be able to advise you about what to do in regards to the reports and payments already made.

A sole proprietor is not an employee, and therefore, should not receive a W-2, in my opinion. I think that the money he was paid should go to his drawing account. I don't know for sure, but suspect that any taxes paid on his behalf will be credited to your federal and state tax accounts for future periods.

Can anyone provide more info?

[irsfixer]

cfhamman wrote: A sole proprietor was mistakenly paid as an employee for 3 months (2nd quarter), paying/withholding employment taxes for federal and state withholding & unemployment and social security taxes. At year end, should a W-2 be sent for the 3 month period? Should IRS & State be notified of the error in order to credit employment taxes withheld by mistake? What else needs to be corrected?

You should file a 941c for the federal withholding and the state equivalent to zero out the quarterly reports. Treat the salary as a draw. Of course - no W-2.

[Ahshucks]

I agree with Mike. 941s can become a real source of "back" frustration if not filed properly to begin with. Always take the opportunity to settle the error as early as possible.