Deceased employee W2 amendment created negative payroll liability – Help?

Navigating Payroll Complexities After the Loss of an Employee

The unexpected passing of an employee can complicate not only the emotions within a company but also its financial processes. A recent dilemma faced by an organization highlights these challenges, particularly in relation to payroll and tax filing.

The Situation

Sadly, one of the company’s owners passed away at the end of December 2023. Unfortunately, due to timing issues, a paycheck was still issued for the pay period in question, which took place in early 2024. This paycheck included withholdings for a 401(k) loan repayment and standard deductions. Compounding the issue, a W-2 form was generated for this deceased employee at the end of January 2024—a practice that is generally not permissible.

As I joined the company post-event, I found that this oversight necessitated communication with our payroll service provider to amend the W-2 and instead issue a 1099 form for the estate’s tax filing. However, this amendment triggered journal entries that have resulted in negative balances in both the loan and withholding liability accounts.

The Challenge

In typical circumstances, a business would refund the relevant amounts to the deceased employee’s estate in a timely manner. Unfortunately, due to the lapse in time—between the employee’s death and the filing of taxes—the funds from the 401(k) account had already been transferred elsewhere, which further complicated how to manage the loan payments and withholding amounts.

Seeking Solutions

Now, the pressing question is how to rectify these negative liabilities. One option being considered is creating a journal entry to shift the amounts from the payroll liabilities to payroll expenses. However, I’m keen to understand the implications of such an action. Specifically, what changes would this make to the overall balance sheet beyond simply resolving the negative liability?

Conclusion

If you find yourself in a similar situation, it’s essential to approach it with careful consideration and thorough understanding. Engaging with a professional accountant or financial advisor can provide clarity and ensure compliance with tax regulations and payroll processes. While navigating the complexities of payroll after a loss can be challenging, appropriate corrective measures can help restore balance to your financial records.