CP05A for an S Corp Owner: Tax Paid by EFTPS, Not Withheld

What does a CP05A mean when my S corporation pays me?

A CP05A means the IRS needs documents that verify the income and federal tax withholding on your return before it releases the refund (IRS: CP05A notice). If you own the corporation that pays you, you are on both sides of that check: the 1040 you filed, and the W-2 and Forms 941 your corporation filed.

The rule is short. The credit on your 1040 is for income tax actually deducted from your pay (Treas. Reg. 1.31-1), and W-2 box 2 is where the IRS looks for it. Payments an S corporation makes to an officer must be treated as wages to the extent they are reasonable pay for services (IRS: S corporation compensation).

A mismatch that can trigger a CP05A: the 1040 claims the EFTPS payment on the withholding line, but W-2 box 2 is smaller. Where the payment posted decides the next step. A payment under your own SSN as estimated tax belongs on the estimated payments line, and nothing in it changes the payroll filings. A payment under the corporation's EIN, or a W-2 showing tax that never came out of pay, needs a look at the Forms 941 and W-2.

A case is not simple when:

• the money went to EFTPS under a different tax type, EIN, SSN or period than you meant;
• the corporation paid it from its own bank account;
• the W-2 or a Form 941 shows withholding that never came out of pay;
• your 1040 already claimed the payment as withholding;
• the year is closed, which limits what Forms 941-X and W-2c can change.

Which of these applies is settled from the payment history and the payroll records, so start there. Gather first: EFTPS payment history, the Forms 941 for all four quarters, the W-2, the payroll register and pay statements, the notice and the filed 1040. If a payroll service files your Forms 941 and W-2, ask it for the four returns, the register and its deposit report. For what a CP05 or CP05A is in general, see CP05, 4464C and 5071C: Refund Held for Review or ID Check.

Was my EFTPS payment withholding or an estimated tax payment?

It depends on the tax type chosen when the payment was made and the number it posted under. EFTPS takes income, employment, estimated and excise federal tax payments (IRS: EFTPS), so one bank debit can land in different places.

To see where it went, use the payment histories. EFTPS keeps 15 months of history. An individual online account shows up to 5 years of payments, including estimated tax payments (IRS: Your Online Account). An S corporation's designated official (an officer or managing member who is a current W-2 employee and can legally bind the corporation) has full access to payment history and transcripts in a Business Tax Account. A shareholder with a Schedule K-1 gets limited access, only for the years the IRS lists with a K-1 on file, which may not reach the year you are checking (IRS: Business Tax Account). A tax account transcript shows payment types (IRS: Transcript types). If the records show a payment posted to the wrong account, the IRS has internal procedures to trace a payment and transfer a credit, including from a corporation's account to an individual's, with the EFTPS EFT number as evidence (IRM 21.5.8). These are IRS processing procedures, not a right to reclassify a valid payroll deposit.

The label also changes timing. Withheld tax is generally treated as paid in equal parts on each estimated-payment due date unless you can show otherwise, while an estimated payment counts for the period it was made. A late-year estimated payment can leave earlier periods short and lead to an underpayment penalty on Form 2210 (IRS: Form 2210 instructions; IRS: Pub. 505).

What counts as federal income tax withheld in box 2 of my W-2?

Only tax actually withheld from your wages. Box 2 shows the total federal income tax withheld from the employee's wages for the year (IRS: W-2 and W-3 instructions). The 1040 line for tax withheld on Forms W-2 (line 25a on the latest form) adds the box 2 amounts (IRS: Form 1040 instructions).

Withholding is taken from pay as it is paid. Publication 505 says you can't give your employer a payment to cover withholding for past pay periods or a payment for estimated tax, and that a change to withholding is made with a new Form W-4 (IRS: Pub. 505). A lump sum sent in later is not tax taken from past paychecks.

What if the corporation paid my tax but never took it out of my pay?

This applies where the money reached the corporation's Form 941 account; a payment under your own SSN is covered in the table above.

If the corporation paid you wages and never deducted income tax it was required to withhold, that is a failure to withhold under section 3402. Extra tax you chose to pay on top of what was required is not required withholding. If an employer fails to withhold but the employee's own income tax on that pay is later paid, the IRS does not collect the same tax from the employer. Penalties and additions to tax still apply, and the employer must be able to show the income tax was paid (26 U.S.C. 3402(d); Treas. Reg. 31.3402(d)-1).

The IRS has forms for that showing. On Form 4669 the employee states that the payments were reported on a return and the tax paid. The employer sends it with Form 4670 to ask for relief from the tax; Form 4670 says penalties remain. For income tax withholding it also calls for an examination report and, if the tax has been paid, an adjusted return such as Form 941-X, so whether this route fits a given case is a professional's call.

Two different facts can look alike. A surplus deposit the corporation sent by mistake is not tax it paid for you. But if the corporation pays income tax imposed on you without deducting it from your pay or being reimbursed, the regulations count the amount as additional wages (Treas. Reg. 31.3401(a)-1(b)(6)). The Form 941-X instructions say the same for tax paid on an employee's behalf and call for correcting the wages on Form 941-X and Form W-2c. Not deducting from pay therefore does not settle what box 2 should show.

The IRS examination manual adds that income tax not withheld but paid by the employer after December 31 of the wage year cannot be taken as a credit for withheld tax on the employee's return. That is internal IRS guidance, not binding law (IRM 4.23.8.2). The IRS instructions cited here do not say how a year-end EFTPS payment of your kind is classified. That turns on what was paid, from whose account, under which number and tax type, when, and whether reimbursement was due, and a professional decides it from the payment history.

How do my Forms 941 and W-2 have to match, and what does the IRS compare?

They have to agree. The IRS matches the four quarterly Forms 941 with the W-2 amounts totaled on Form W-3 for income tax withholding, Social Security wages, Social Security tips, and Medicare wages and tips. If they differ, the IRS or the Social Security Administration may contact the employer (IRS: Form 941 instructions). Some differences have valid reasons; the employer keeps the reconciliation (IRS: W-2 and W-3 instructions).

Line 3 of Form 941 asks for tax withheld or required to be withheld, while box 2 can show only tax withheld. A corporation that never took out tax it was required to withhold can therefore have a Form 941 and a W-2 that disagree. That gap is what needs an explanation (IRS: Form 941 instructions).

How do I correct the 941 and the W-2 (Forms 941-X and W-2c)?

Start from what was actually withheld and whether the corporation bore your tax as wages (above); the payroll records decide the W-2, and the W-2 decides your credit. Correcting box 2 changes the withholding credit on your 1040: if the filed return claimed more than was withheld, the refund can shrink or become a balance due unless the payment is shown on the estimated payments line instead, which depends on where it posted (Treas. Reg. 1.31-1). Form 941-X corrects a filed Form 941 and is filed separately from it. Form W-2c corrects a filed W-2: file it with the SSA on Form W-3c and give the employee a copy, both as soon as possible after the error is found. A W-2c can require a matching Form 941-X (IRS: W-2 and W-3 instructions; IRS: Pub. 15).

The two forms limit corrections to income tax withheld:

• Form W-2c, box 2: only for an administrative error, defined as a box 2 amount that is not the amount actually withheld. On that wording, a box 2 amount that never came out of pay is not the amount actually withheld, unless the corporation bore the tax as wages (above) (IRS: W-2 and W-3 instructions).
• Form 941-X, income tax withheld: generally only for errors found in the same calendar year the wages were paid. For earlier years, the instructions allow only "administrative" errors, meaning the line 3 amount is not what was actually withheld, and then caution that only transposition or math errors count. The other exception, section 3509 rates, applies when an employee was treated as a nonemployee and does not fit this case (IRS: Form 941-X instructions).

For a closed year, those two readings do not line up, and the instructions do not reconcile them. The regulations define an administrative error as one "involving the inaccurate reporting of the amount withheld" (Treas. Reg. 31.6413(a)-2(c)(2)). Separately, an employer that paid the IRS more than the correct income tax required to be withheld may claim a refund, but not for tax it deducted or withheld from an employee (Treas. Reg. 31.6414-1). A genuine surplus deposit may fit that rule; it creates no withholding credit on your return. Pub. 15 gives math and transposition errors as an example of an administrative error; the Form 941-X instructions say only those are administrative (IRS: Pub. 15). Which corrections are open then depends on the facts. Form 941-X also has time limits: an overreported-tax correction is due within 3 years of filing the Form 941 or 2 years of paying the tax, whichever is later, and an underreported-tax correction within 3 years of filing. A Form 941 filed before April 15 of the next year counts as filed on April 15 (IRS: Form 941-X instructions). A CP05A comes after the 1040 is filed, so the wage year has usually ended and the earlier-year rules apply. For correcting a payroll run in general, see Payroll Mistake: Fix Overpaid Wages, Form 941-X and W-2c.

How should my personal return show the payment?

On the line that matches what the payment was. Tax withheld on your W-2 goes on the withholding line; estimated tax payments you made go on the separate estimated payments line (line 26 on the latest form) (IRS: Form 1040 instructions). The instructions credit payments you made; they do not say how to claim a payment that posted under the corporation's EIN.

If the filed return already claimed the payment as withholding, Form 1040-X has separate lines for withholding and for estimated tax payments (lines 12 and 13). Changing withholding means attaching the corrected W-2s (IRS: Form 1040-X instructions). A paper 1040-X sent in response to a notice goes to the address in the notice. Whether to amend or answer the notice first is covered in CP05, 4464C and 5071C: Refund Held for Review or ID Check.

What do I send in reply to the CP05A?

Reply by the date on the notice with documents that show the federal tax actually withheld. The IRS lists at least 3 pay statements or check stubs, including the end-of-year statement, or a letter from the employer on company letterhead, and says not to send a copy of the W-2 (IRS: CP05A notice).

Pay statements with no withholding do not support a withholding claim, so settle which line the payment belongs on before you reply. If the payment was an estimated payment but the return claimed it as withholding, the documents will not support the claim. The notice has a reply date, and a question about which line the payment belongs on does not move it. Whether to amend first or reply first, how to send the documents and how long to wait are in CP05, 4464C and 5071C: Refund Held for Review or ID Check.

How do I pay my own tax correctly from now on?

A payment counts one way or the other: as your own estimated tax under your SSN, or as tax withheld from your pay.

• Estimated payments. Pay as estimated tax under your own SSN. The IRS says individuals can no longer create new EFTPS accounts (IRS: EFTPS); the other ways to pay are in Estimated taxes for S corporation owners.
• Withholding. Give the corporation a new Form W-4 with an extra amount in Step 4(c) for each paycheck. The employer must put it in effect by the first payroll period ending on or after the 30th day after receiving it (IRS: Pub. 505). The tax then comes out of pay, appears on the pay statements and Form 941 line 3, and is in W-2 box 2.

How much to pay and when is in the same guide.

Example

These examples are illustrative. All amounts are in US dollars.

Paid under her own SSN as estimated tax

An S corporation owner takes a US$90,000 salary and has US$12,000 withheld from pay over the year. In December she pays US$25,000 through EFTPS under her own SSN as an estimated tax payment. If it posted that way, her 1040 shows US$12,000 on the W-2 withholding line and US$25,000 on the estimated payments line, and nothing in it changes the W-2 or Form 941.

Paid under the corporation's EIN with nothing withheld

An S corporation owner with a US$90,000 salary and US$12,000 withheld sends US$25,000 in December under the corporation's EIN as a Form 941 deposit, but no payroll was reduced. Assume the quarter's regular payroll taxes were reported and fully deposited, and the US$25,000 is a surplus deposit, not tax paid for her. If the Form 941 reports only the US$12,000 actually withheld, the extra deposit exceeds the quarter's tax and shows as a Form 941 overpayment, and W-2 box 2 stays at US$12,000. Line 3 reports tax withheld or required to be withheld on the wages paid, not what was deposited; a line 3 that includes the extra US$25,000 would not match the W-2 and would need an explanation. If instead the corporation paid her tax without deducting it or being reimbursed, the US$25,000 is additional wages and the payroll filings change. Whether it is that, a surplus deposit or her misposted estimated payment is decided from the payment history.

W-2 shows no withholding but the return claims it

An S corporation owner's W-2 box 2 shows US$0, her pay statements show no withholding, and her 1040 claims US$25,000 as withholding. A CP05A asks for documents that verify tax withheld, and these show none. Her next step is to find where the payment posted. If it posted under her SSN as estimated tax, it belongs on the estimated payments line, not the withholding line.

Different for you?

• You have a CP05A or a held refund, and the payment sits under the wrong tax type, EIN or SSN, or your W-2 shows withholding that never came out of pay: the payment history and payroll records decide which account holds the money, whether Forms 941-X and W-2c are needed, and what to send the IRS. Bring the EFTPS history, Forms 941, W-2, payroll register, notice and 1040 to corporate tax help.
• You only need to know what a CP05 or CP05A is and how to reply: see CP05, 4464C and 5071C: Refund Held for Review or ID Check.
• You missed deposits, got a Form 941 penalty, or worry about personal liability: see Behind on Payroll Taxes: Returns, Penalties and Liability and get corporate tax help.
• Your payroll register, bank records and books do not agree on what was paid, withheld and deposited: those records have to agree before any correction is filed; see bookkeeping help.
• A payroll service filed the Forms 941 and its deposits do not match what you paid: see Payroll Provider Didn't Deposit Taxes: IRS Notice, What to Do.
• You are unsure how much salary to take: see S Corporation Owner Salary: How Much and How to Fix Past Years.
• A payroll run was wrong or overpaid: see Payroll Mistake: Fix Overpaid Wages, Form 941-X and W-2c.
• No payroll was run for you this year: see S Corp Never Ran Payroll: Catch Up Owner Salary by Year-End.
• You need your personal estimates set up: see Estimated taxes for S corporation owners.