How to Adjust Payroll Liabilities in QuickBooks Online

Caught a discrepancy in your payroll numbers after you've already run the checks? Whether it's a small tax overpayment, a missed deduction, or a historical error, your payroll liability accounts need to be precise. Leaving them uncorrected can create a cascade of problems in your financial statements and tax filings. This guide will walk you through exactly how, when, and—most importantly—where to adjust payroll liabilities in QuickBooks Online to keep your books clean and accurate.

Why Would You Need to Adjust Payroll Liabilities?

Adjusting payroll liabilities isn't about fixing a typo on an upcoming paycheck; it's about correcting the balances on your chart of accounts after payroll has been processed. The need for an adjustment usually arises from a few common situations. Understanding the "why" helps you choose the right approach to fix the problem.

• Overpayment or Underpayment of Payroll Taxes: This is the most frequent reason. It can happen from using an outdated tax rate, a minor rounding difference that adds up over time, or receiving a notice from a tax agency indicating a small balance due or a credit. For example, you might have continued to pay a state unemployment tax for an employee whose wages surpassed the annual limit.
• Incorrect Employee Deductions: Mistakes in setting up benefit-related deductions are also common. You might have forgotten to record the company's portion of a health insurance premium, entered the wrong 401(k) contribution rate, or miscalculated a garnishment. These errors affect both the employee's net pay and the associated liability accounts that track what you owe to third parties (like insurance providers or retirement administrators).
• Recording Historical Payroll Data: If you migrate to QuickBooks Payroll mid-quarter or mid-year, you need to enter all prior payroll information to ensure your quarterly and annual tax forms (like Form 941 and W-2s) are correct. Sometimes, an error in this historical data entry requires a liability adjustment to align your QuickBooks balances with what was actually paid.
• Fringe Benefits and Third-Party Sick Pay: Recording non-cash compensation like group-term life insurance or receiving payments from a third-party disability insurer requires specific adjustments to ensure the related Social Security, Medicare, and unemployment taxes are calculated and recorded correctly. These liabilities often fall outside a regular paycheck run and must be added.

A Critical Warning Before You Begin

Adjusting payroll numbers has direct consequences for your financial records and tax compliance. These adjustments impact the liability accounts on your Balance Sheet and can affect the expenses on your Profit & Loss statement. An incorrect adjustment can create an even bigger reporting mess.

First and foremost, adjusting a liability in QuickBooks does not amend your filed tax forms. If you discover you overpaid FUTA taxes on last quarter's Form 941, making an adjustment in QuickBooks corrects your books, but you still need to file Form 941-X, Adjusted Employer's QUARTERLY Federal Tax Return or Claim for Refund, with the IRS to officially correct the filing and claim your refund.

Because of these complexities, it's always best practice to consult with your accountant before making significant payroll adjustments. If you're correcting a simple, obvious error you're confident about, proceed with caution. If you are unsure about the tax or accounting implications, stop and ask a professional for guidance.

How to Adjust a Payroll Liability in QuickBooks Online

The correct method for adjusting liabilities depends on the specific error you need to fix. QuickBooks Online's payroll system is designed to have most corrections made through its own tools, not through manual journal entries. This ensures the payroll reports match your general ledger perfectly. The most common scenarios are handling tax overpayments and underpayments.

Correcting a Payroll Tax Overpayment

Let's say you receive a notice from your state tax agency that you have a $125 credit because you overpaid your state unemployment tax last quarter. You need to record this in QuickBooks so your liability balance is correct and you can apply that credit to a future payment.

Step 1: Navigate to the Payroll Tax Center

1. Log in to your QuickBooks Online account.
2. From the left-hand menu, click on Taxes and then select Payroll Tax.
3. Go to the Payments tab. This is your central hub for all paid, due, and upcoming payroll tax payments.

Step 2: Locate the Prior Payment and Resolve the Overpayment

1. Find the tax payment you overpaid. You may need to change the date range or switch from "Due" to "Completed" payments.
2. Once you've found the specific payment, click on it to view the details or look for an action menu next to it.
3. Select the option labeled Resolve Overpayment or a similarly-worded action. This tells QuickBooks you need to account for a credit with the agency.

Step 3: Enter the Adjustment Details

1. A new window will appear. QuickBooks will prompt you for the adjustment date and the amount. Enter the total amount of the overpayment (e.g., $125).
2. You will be asked how the tax agency handled the credit. You typically have two choices:
   • For a Future Tax Payment: Choose this if the credit will be applied to your next tax bill. This is the most common option. QuickBooks will hold this credit, and when the next payment for that same tax is due, it will automatically reduce the amount you need to pay.
   • We Received a Refund Check: Choose this if the tax agency physically mailed you a check. QuickBooks will guide you on how to record the deposit correctly and clear the associated liability.
3. Confirm the details and save the adjustment. QuickBooks will create the necessary background transaction to reduce the liability on your books.

Correcting a Payroll Tax Underpayment

Fixing an underpayment usually involves an extra step: actually paying the tax shortage to the agency. The adjustment in QuickBooks typically comes before or after you make that payment to ensure your books match reality.

If you discover an underpayment before the agency sends a notice, you should remit the additional tax due as soon as possible. After you've paid it, you can record it in QuickBooks.

Step 1: Find the Liability in the Payroll Tax Center

Go to Taxes > Payroll Tax. Depending on your setup and how you pay taxes, you might find the outstanding liability in the "Due" section.

Step 2: Record the Additional Payment

If you paid the shortfall outside of QuickBooks (for example, by mailing a check or paying directly on the agency's website), you need to record it:

1. In the Payroll Tax center, find the tax item. If it’s already listed as Due, you may be able to click on it and choose Record Payment.
2. If the original payment is in the "Completed" list but was for the wrong amount, you might need to create an additional payment to clear the remaining balance. Find the tax in the payments list and select Enter Prior Tax Payment.
3. Enter the payment date, the amount of the shortfall you paid, and ensure the bank account it came from is correct. This tells QuickBooks you have settled the debt and reduces the liability balance to zero.

For more complex payroll errors that caused the underpayment (like needing to run a correction paycheck), QuickBooks generally recommends resolving the issue at the source rather than just adjusting the liability. In those cases, working with their support team or your accountant is advised.

Do NOT Use a Manual Journal Entry to Adjust Payroll Liabilities

You may be tempted to go straight to the Chart of Accounts and create a journal entry to debit a liability and credit an expense. This is almost always the wrong approach when you use an integrated payroll system.

QuickBooks Payroll operates on a sub-ledger. This detailed sub-ledger tracks what is owed for each specific tax type (Federal Withholding, FICA, FUTA, SUI, etc.) and for each individual employee. The balances from this sub-ledger are what populate the reports in your Payroll Tax Center and determine the tax payments QuickBooks prompts you to make.

When you use a journal entry, you only adjust the top-level account balance on the General Ledger (your Balance Sheet). You completely bypass the payroll sub-ledger. The result? Your Balance Sheet might look right, but your Payroll Tax Center will still show an incorrect amount due, your payroll reports will not match your financials, and you will be stuck in a cycle of unresolved discrepancies.

The golden rule is: if the liability was created by QuickBooks Payroll, it must be corrected within the QuickBooks Payroll module.

Final Thoughts

Adjusting payroll liabilities in QuickBooks Online is a task that demands accuracy, and the key is to always use the system's specialized tools. By navigating to the Payroll Tax center and resolving overpayments or recording additional payments, you ensure both your main financial statements and your detailed payroll reports stay in perfect harmony.

When payroll discrepancies uncover deeper questions about tax calculations, state filing requirements, or the proper reporting for a unique employee benefit, research can quickly consume your day. We created Feather AI to give accountants and financial professionals immediate, citation-backed answers from authoritative IRS and state sources. It transforms hours of searching into seconds of certainty, empowering you to solve complex issues with speed and confidence.