What's covered in this guide?
When tax carryover happens
Tax carryover handles the case where an employee's direct-deposit wages can't cover the taxes Workforce needs to withhold. The most common cause is a tipped employee: cash tips have already been paid out of the till, so the only money Workforce can withhold from on payday is the regular wages still flowing through direct deposit. When that's not enough to cover the full FICA, federal income tax, and state income tax owed on tips + wages, Workforce defers the uncollected portion and recovers it on the next pay run.
For most pay runs, an employee's gross wages are large enough that Workforce can withhold every tax in full and still pay a positive net amount via direct deposit. Carryover is the exception, and it's almost always driven by tips.
Cash tips count as taxable wages — they're subject to the employee's share of Social Security and Medicare (FICA), federal income tax, and state income tax. But the cash itself never flows through payroll: the employee already pocketed it on the night of the shift. So at payday, Workforce has to compute tax on (regular wages + reported cash tips) but can only withhold from the regular wages portion. If reported tips are large relative to regular wages, the math runs out of money before all the tax is collected.
A simple example: an employee works a short week, earns $100 in regular wages, and reports $900 in cash tips. FICA alone is 7.65% of $1,000 = $76.50, plus federal and state income tax on top. The most Workforce can pull from the $100 direct-deposit check is $100 — so the rest is carried over.
The IRS rules behind it
The IRS expects employers to make a good-faith effort to collect the full tax on tipped wages. Two rules shape how Workforce handles carryover:
Catch-up collection within the year. If an employee's direct-deposit wages can't cover all the FICA owed on their cash tips in one pay period, the employer is expected to recover the shortfall from the employee's wages on later pay runs in the same calendar year.
W-2 reporting at year end. Any FICA the employer was unable to collect by December 31 must be reported on the employee's W-2 in Box 12 — code A for uncollected Social Security tax on tips, code B for uncollected Medicare tax on tips. The employee then pays the uncollected amount with their personal income tax return.
Workforce implements both. The carryover ledger drives the catch-up withholding throughout the year, and any balance still outstanding when W-2s are produced flows automatically into Box 12 with the correct code.
How Workforce tracks and recovers it
Carryover is automatic. Every time a pay stub is calculated, Workforce runs through this sequence per tax type per employee:
Calculate the full tax owed on the period's wages (regular pay + reported tips + any other taxable income).
Withhold as much as the available net pay supports.
If anything was left uncollected, defer it to a per-employee, per-tax-type carryover balance. The balance is dated to the current tax year and tracked separately for federal income tax, each state income tax the employee owes, employee Social Security, and employee Medicare.
On the employee's next pay run, before computing new withholding, Workforce checks for any open carryover balance for that tax. If wages on this run are large enough, it withholds the regular tax for the period plus the catch-up amount — up to whatever net pay supports. If still not enough, the remainder stays on the balance and rolls to the run after that.
A few details worth knowing:
Each tax type carries independently. A federal income tax shortfall and a Medicare shortfall create two separate carryover balances and are recovered on their own schedules.
Only employee taxes carry. Employer-side FICA, FUTA, and SUTA are funded by the company and don't depend on net pay, so they never trigger carryover.
Deadlines differ by tax type. Income-tax balances (federal and state) have a year-end deadline — they can be recovered on any pay run through December 31. FICA balances (Social Security and Medicare) have a tighter window: the deadline is the 10th of the month following the pay run's payment date. Anything still outstanding after its deadline is no longer offered for recovery and lands on the W-2 (see below).
What you'll see on the pay stub
When a pay stub has carryover activity, Workforce shows an Employee Tax Carryover table in the taxes section of the stub. Each row is one tax type with an open or recovering balance, and the columns are:
Deferred — tax that was added to the carryover balance on this pay run because there wasn't enough net pay to cover it.
Withheld — additional tax taken on this pay run to pay down a previously deferred balance.
Balance (or Prior Balance on a draft pay stub) — what's still outstanding for that tax type after this pay run.
Window Closes — the deadline for recovering this balance through payroll. For income-tax lines this is December 31; for FICA lines (Social Security and Medicare) it is the 10th of the month following the payment date the balance was created on.
On a draft pay stub the table also shows a tooltip noting that the displayed balance excludes the current draft pay run — the balance updates once the run is posted.
Overriding the catch-up withholding
By default, Workforce will withhold as much of an outstanding income-tax carryover balance as the current pay run's net pay allows — that's the safe, IRS-aligned behavior. There are situations where you want to take less than the maximum on a particular run (for example, the employee has asked to spread the catch-up over more pay periods, or the catch-up would leave them with an unworkably small paycheck). For federal and state income tax carryover lines, you can override the amount Workforce withholds on a draft pay stub.
Override is only available for personal income tax (federal and state) carryover lines. FICA carryover (Social Security and Medicare) cannot be overridden — uncollected FICA flows to Box 12 of the W-2 if not recovered through payroll.
To override the catch-up:
Open the draft pay run and click into the employee's pay stub.
Scroll to the Employee Tax Carryover section.
On the row for the income tax line you want to adjust, open the row's actions menu (the dots icon at the end of the row) and choose Override.
In the Override Tax Carryover Withholding dialog, enter the dollar amount you want Workforce to withhold on this run in the Override Amount field. Leave it blank to revert to withholding the maximum.
Tick the acknowledgement checkbox confirming you accept that reducing the catch-up withholding may not be compliant with tax authority guidelines.
Click Override Withholding.
The pay stub recalculates immediately. The carryover row shows an alert icon next to the withheld amount so you can see at a glance that this line has been overridden. To remove the override and go back to the default catch-up amount, reopen the dialog and click Reset Withholding.
A few constraints to be aware of:
The override is only available on a draft pay stub inside a draft regular pay run. Once the run is posted, the override is locked in and the deferred balance reflects what was actually withheld.
The override amount must be between $0 and the maximum that the run can support — Workforce won't let you over-withhold beyond the available net pay.
Anything you choose not to recover this run stays on the carryover balance and is offered up again on the next run.
Year-end and the W-2
The recovery window depends on the tax type. Income-tax balances (federal and state) close at December 31 — they can be recovered on any pay run through the end of the year. FICA balances (Social Security and Medicare) have a shorter window: the 10th of the month following the payment date they were created on. A FICA shortfall from a November pay run, for example, must be recovered by December 10 or it will not be offered for catch-up again.
If every balance has been recovered before its deadline, the W-2 simply shows the correct full-year withholding. Carryover leaves no footprint on the W-2.
If FICA (Social Security or Medicare) is still outstanding at its deadline, Workforce reports the uncollected amount on the employee's W-2 in Box 12 — code A for Social Security, code B for Medicare. The employee settles the balance with their personal tax return.
Outstanding income-tax carryover at year end means the employee was under-withheld for the year. They will reconcile that on their personal return; Workforce reports actual withholding on the W-2 as normal.
Tip: Because FICA balances close on the 10th of each following month, don't wait until year-end to clear them. If you can see an open FICA balance on a pay stub, plan a catch-up on the next pay run before the window closes. For income-tax carryover, you have until December 31, but clearing it before the final run of the year avoids any year-end surprises.