Deceased employee W2 amendment created negative payroll liability – Help?

Navigating Payroll Liabilities After the Loss of an Employee: A Guide for Employers

The unexpected passing of a valued employee can create numerous challenges for a business, particularly in the realm of payroll and tax compliance. A recent case highlights some key issues that may arise, particularly regarding the handling of W-2 forms and employee deductions posthumously.

In this instance, an owner of a company sadly passed away at the end of December 2023. The company’s payroll cycle meant that he was issued a paycheck in January 2024, which included the usual deductions for a 401(k) loan as well as other regular contributions. However, it came to light that the issuance of a W-2 form for someone who is deceased is generally not permissible.

As it stood, the estate of the deceased employee instructed their tax filings, which led to the necessity of amending the W-2 and providing a 1099 form instead. This situation, however, has led to complications; the amendment prompted a journal entry from the payroll service provider, which resulted in negative balances in both the loan and withholding liability accounts.

Typically, under more straightforward circumstances, any amounts in these accounts would be refunded to the estate. Unfortunately, the time elapsed between the employee’s passing and the estate’s tax filing meant that funds had already been transferred from the 401(k) accounts. This further complicated the matter, as the principal deductions were also removed from the books.

If you find yourself in a similar situation, you may be wondering how to address these negative liabilities. One potential resolution could involve creating a journal entry that shifts the outstanding amounts from the payroll liabilities to payroll expenses.

What You Need to Consider

1. Clearing Negative Liabilities: The immediate effect of this adjustment would be to eliminate the negative balance on your payroll liability accounts, which is essential for maintaining accurate financial records.

2. Impact on the Balance Sheet: Moving amounts from liabilities to expenses may affect your balance sheet by reducing your liabilities while simultaneously increasing your expenses. This adjustment could ultimately impact your net income for the reporting period.

3. Consulting Professionals: Given the complexities that can arise from these changes, it may be beneficial to engage with a certified accountant or tax professional who can provide guidance tailored to your specific circumstances.

Conclusion

While losing an employee creates inherent challenges, including navigating payroll discrepancies, there are ways to rectify the situation. By understanding the key financial implications of amendments to payroll accounts