Navigating Payroll Challenges After the Loss of an Employee: Seeking Solutions for W2 Amendments

The unfortunate passing of an employee can create unexpected complications in payroll processes, particularly regarding tax documents and liabilities. Recently, a situation arose where a company owner passed away at the end of December 2023, leading to a series of payroll and tax-related issues that must be carefully addressed.

As the timing of payroll can be tricky, payday for the final pay period fell in January 2024—a time when the deceased employee was still included in the payroll system. A paycheck was processed for him, including deductions for a 401(k) loan payment and standard withholdings. Subsequently, a W2 was generated at the end of January, an action that is typically prohibited for individuals who are no longer living.

Since I wasn’t part of the company during this period, I needed to coordinate with the payroll service to amend the W2 and issue a 1099 in light of the employee’s passing. The amendment, however, resulted in a journal entry from the payroll provider that introduced a negative liability on our accounts for both the loan and the withholding.

In a timely situation, the business would reimburse the estate for these amounts. However, due to delays between the employee’s death and the tax filings, the estate had already transferred funds from the employee’s 401(k) into a different account, inadvertently relocating loan payments and standard withholdings as well.

The question now is: how do we rectify this situation?

Could the solution be as straightforward as creating a journal entry to transfer these amounts from payroll liabilities to payroll expenses? Additionally, what implications might this adjustment have on the balance sheet, besides eliminating the negative liability?

It’s crucial to approach this situation methodically. Here are the steps to consider:

1. Assess the Payroll Liabilities: Take a close look at the current entries in your payroll liability accounts to understand the full extent of the negative balances.

2. Create the Appropriate Journal Entry: If you determine that writing off the negative liability by moving amounts to payroll expenses is appropriate, document this carefully. It’s important to ensure that this entry aligns with Accounting best practices and that it accurately reflects the intent to resolve the liabilities stemming from the W2 amendment.

3. Consult with Professionals: Given the complexities surrounding tax laws and payroll regulations for deceased employees, it’s wise to consult with an accountant or tax professional. They can provide insights into the best course of action moving forward