If you change the tax status (exempt from or deduct before options) on setup for an income/deduction after using it in a payroll, you could invalidate one or all of your quarterly reports and your W2/W3 statements at the end of the year. Changing the tax status for an income/deduction is most apparent in your 941 quarterly report or 944 annual report and is most often spotted when the line 7a (line 6a on the 944) “Fractions of Cents” adjustment is more than $1.00.

The payroll program calculates the 941 and 944 reports based on the settings currently in the files. Since part of the income/deduction for the quarter/year is not being reflected in the new setup, the report will be incorrect and most likely show a large adjustment on line 7a (line 6a) for “Fractions of Cents”. Also, at the end of the year, your W3 statement and 941s from the 4 quarters or 944 annual report won’t reconcile and the W2s won’t be correct.

If you need to change the tax status of an income/deduction after using it in a payroll, you should create a new income/deduction with the new, correct tax status and assign it to all employees it applies to. You will then need to “turn off” the old income/deduction by changing the rate/amount to zero. All balances on the old income/deduction will remain and be reported according to the old setup, but will no longer be used in calculations.