Refund or pay employees for over withheld local taxes that were never paid to taxing authority. Withheld money is currently in payable account.

Thank you for posting your concern here in the Community about refunding your employees for over withheld local taxes in QuickBooks Online. Let me assist you with this.

First, you'll need to create a reimbursement item, here's how:

1. Go to Payroll, then Employees.
   
2. Select your employee.
   
3. From Pay types, select Start or Edit.
   
4. Scroll to the Additional pay types section and select Reimbursement.
5. If there's an existing reimbursement pay type, you can add a new one in the Common pay types section dropdown. Just select + Another Reimbursement type to add new.
   
6. You can add the default amount or leave it blank, and just enter the amount as you run payroll.
7. You can also rename this pay type. To rename, select Edit next to Reimbursement.
8. When you’re finished, select Save.

After creating the reimbursement site, you'll need to run the reimbursement amount. Next, once you're done, you can now proceed to Step 3: Run payroll with the reimbursement amount found in this article.

Moreover, for additional information about handling withheld in QuickBooks Online Payroll: Handle over withheld or underheld employee-paid taxes.

The Community Team is always ready to respond and assist if you have questions or concerns about reports in QBO or have any other queries related to the program. We encourage you to utilize the Reply button for any queries. We're excited to assist you and look forward to supporting your business success.