Deceased employee W2 amendment created negative payroll liability – Help?

Navigating Payroll Challenges After the Loss of an Employee

When facing the complexities of payroll management, unexpected situations can arise—especially in the unfortunate event of an employee’s passing. Recently, a scenario unfolded involving a deceased employee that raised critical questions about W-2 amendments, payroll liabilities, and fiscal responsibility. Here’s a breakdown of the situation and guidance on navigating similar challenges.

Understanding the Context

Towards the end of December 2023, our company experienced the loss of one of our owners. Compounding the tragedy, payroll for this individual continued into January 2024, which is when the complications began. A paycheck had been issued that included deductions for a 401(k) loan and regular contributions. However, this situation took a turn when a W-2 was generated in January 2024. It’s important to note that issuing a W-2 for a deceased employee is not compliant with IRS regulations.

The Complications of Amending a W-2

Since I was not part of the team at the time of these events, I had to take the initiative to rectify the matter upon receiving paperwork pertaining to the deceased’s tax filings. This necessitated contacting our payroll service provider to amend the W-2 and issue a 1099 form instead. Although this step aimed to correct the earlier mistake, it inadvertently triggered a journal entry from the payroll service provider that resulted in a negative liability in our loan and withholding accounts.

The Dilemma of Timeliness and Fund Allocation

Complications intensified due to the time that elapsed from the employee’s death to the tax filing. By this point, the estate had already transferred funds from the employee’s 401(k) accounts, including those covering the loan payments and deductions. This created a quandary on how to appropriately address the negative liabilities left on our balance sheet.

Seeking Solutions

Now the pressing question is: how do we resolve this negative liability issue? One potential solution could involve creating a journal entry (JE) that reallocates these amounts from payroll liabilities to payroll expenses. This adjustment would clear the negative liability but raises further questions about its implications on the balance sheet.

Clarifying the Impact

Before proceeding with any adjustments, it’s crucial to understand how this action would affect our financial statements:

1. Balance Sheet Adjustments: Moving amounts from payroll liabilities to payroll expenses will eliminate the negative balances reflected in the liability accounts. It’s essential to analyze how this change might influence the overall financial health of