Navigating Payroll Challenges: Resolving W2 Amendments for Deceased Employees

The complexities of payroll management can intensify in unforeseen circumstances, particularly when dealing with the unfortunate passing of an employee. Recently, a company faced an intricate issue involving the W2 amendment of a deceased employee, leading to a negative liability in their payroll accounts. This situation raises important questions about compliance and financial management, especially for those involved in payroll processing.

The Situation at Hand

At the end of December 2023, one of the company owners passed away. Unfortunately, payday for this particular pay period fell in early 2024, during which a paycheck was issued. This paycheck included deductions for a 401(k) loan and other standard withholdings. By late January 2024, a W2 was generated for the deceased, which is generally considered inappropriate for an individual who has passed away.

Due to my absence from the company at the time of these events, I later had to request the payroll service provider to amend the W2 and issue a 1099 for the deceased as the estate prepared to file its taxes. However, this amendment led to a journal entry (JE) from the payroll service that resulted in a negative balance in both the loan and withholding liability accounts.

The Complications of Timing

Typically, in a more timely scenario, the company would refund the outstanding amounts to the estate. However, due to the significant delay between the date of death and the tax filing, the funds had already been moved from the employee’s 401(k) accounts to another account. Consequently, the deductions for the loan payment and regular withholdings were also relocated, complicating the financial landscape.

Seeking a Solution

The fundamental question that arises is how to resolve this negative liability effectively. One potential solution could be making a journal entry to transfer these amounts from the payroll liabilities to payroll expenses. But what implications will this have on the overall financial statements?

Assessing the Impact on Financial Statements

By shifting these liabilities into payroll expenses, you would effectively eliminate the negative balance, but it’s crucial to understand the broader impact on your balance sheet. This adjustment could result in:

• Improved Accuracy: Correcting the liabilities will enhance the accuracy of your financial statements, providing a clearer picture of the company’s financial health.
• Expense Increase: By classifying these amounts as expenses, you may see an increase in total payroll expenses for the period, which could potentially influence profitability metrics