A small difference between Federal Income Tax, Social Security or Medicare withheld on the W2 versus the employee’s last pay stub of the year would be normal if you selected the “Automatically corrected” option (explained above) while importing employee information. However, if the amount were large the reason for the difference is that you have either over or under withheld Social Security and/or Medicare during the course of the year. This can happen if you manually adjust withholdings after they were calculated on the Payroll Check Calculation screen or change the exemption status of a withholding in the Payroll Formula Editor after the check has been posted.

Why does this affect Federal Income Tax?
Since Social Security and Medicare are determined by an exact percentage those numbers are automatically adjusted to be precise. The amount of the correction comes from Federal Income Tax since this is only an estimate of what the employee should have had withheld from their checks. Any differences will be accounted for when the employee files their own personal income tax returns.

What are my options?
If you prefer to use the exact numbers as they are recorded on each check you may do so by selecting the “Exactly as Entered” option and importing the information again. Be aware this will report what was actually withheld as opposed to what should have been withheld and any manual adjustments you may have made will be lost when you re-import the information. [Editor’s note: In 2020, If you chose to defer social security payments (to not withhold SS from employee checks) due to Covid-related legislation please ask your tax advisor how to report this information. You may wish to choose “Exactly as Entered” in this situation. See also: How does the 2020 Payroll Tax Cut affect me?]