Deceased employee W2 amendment created negative payroll liability – Help?

Navigating Payroll Challenges After an Employee’s Passing

The loss of an employee is a challenging event for any business, and the associated payroll complications can become even more complex. Recently, one company faced significant issues following the unfortunate passing of a key employee at the close of 2023. This situation raised questions around the handling of payroll, W-2s, and the implications for the company’s financial records.

Following the employee’s death, the company continued to process payroll as usual, issuing a paycheck for the last pay period, which occurred in January 2024. This check included deductions for a 401(k) loan payment and general payroll withholdings. However, the issuance of a W-2 for a deceased individual raised a potential compliance issue, as typically, a deceased person’s wages should not be reported in this manner.

Upon realizing the error during tax filings for the estate, the payroll service was contacted to amend the W-2 and provide a 1099 instead. However, this amendment led to a journal entry from the payroll service that resulted in negative liabilities in both the loan and withholding accounts.

A pressing question arose: In standard circumstances, the company would likely refund these amounts to the estate, but given the time lapse between the employee’s death and the filing of the estate’s taxes, the funds had already been disbursed elsewhere, complicating matters further.

To address this financial conundrum, one might consider the simplest corrective action: adjusting the journal entries to transfer the amounts from payroll liabilities to payroll expenses. It’s crucial to evaluate the implications of this adjustment on the balance sheet. While it would effectively eliminate the negative liability, it may also alter the expense proportions represented in the financial statements.

Proposed Next Steps

1. Consult with a Financial Expert: Given the complexities surrounding payroll, it may be beneficial to involve an accountant or payroll specialist familiar with tax laws concerning deceased employees.

2. Analyze the Journal Entries: Carefully review the journal entries generated by the payroll service to understand their impact on your financial statements clearly.

3. Adjust as Needed: If moving the amounts to payroll expenses is indeed the best action, ensure all adjustments are well-documented for future reference and compliance audits.

4. Review Company Policies: Consider revisiting and potentially updating company policies and strategies regarding payroll procedures in the event of an employee’s passing to prevent similar issues in the future.

By taking a methodical approach to resolving these payroll issues,