Navigating Payroll Challenges: Amending W-2 for a Deceased Employee

Managing payroll can be a daunting task, especially when unforeseen circumstances, such as the death of an employee, arise. Recently, we encountered a complex situation after the passing of one of our company’s owners at the end of December 2023, and we’re seeking guidance on how to navigate the ensuing complications.

The Situation

After the owner’s unfortunate demise, the last payday for that pay period occurred in early January 2024—a time when the deceased was still considered an employee. During this period, a paycheck was processed that included deductions for both a 401(k) loan payment and standard withholdings. However, issues compounded when we learned that a W-2 was issued for the deceased individual at the end of January 2024, which, reportedly, is against IRS guidelines for deceased employees.

As I was not with the company during this timeframe, I sought to rectify the situation when it came time for the estate to file taxes. The payroll service provider was contacted, and I requested an amendment to the W-2, urging them to issue a 1099 instead to reflect the proper tax treatment.

The Consequence

This amendment, however, resulted in a journal entry (JE) from the payroll service, leading to a negative balance in both the loan and withholding liability accounts. Traditionally, under more timely circumstances, our business would issue refunds to the estate to resolve these negative amounts. However, due to the significant delay between the employee’s passing and the tax filing, the estate had already moved the funds from the deceased’s 401(k) accounts, inadvertently complicating the loan payment and withholding issues further.

Seeking Solutions

Now, the pressing question is: How do we resolve the negative liability situation caused by the W-2 amendment?

One potential remedy seems to be making a journal entry to transfer the amounts from the payroll liabilities to payroll expenses. However, I’m keen to understand what this would mean for our financial statements. Would this action merely eliminate the negative liability, or would other implications arise on our balance sheet?

Conclusion

Navigating the intricacies of payroll following the death of an employee requires meticulous attention to detail and an understanding of tax regulations. As we strive to correct our financial records and alleviate the negative liabilities, any insights or experiences shared by others who have faced similar circumstances would be greatly appreciated. Together, we can ensure our payroll practices are compliant and