Navigating Payroll Challenges After an Employee’s Passing: Seeking Solutions for W-2 Amendments

The passing of an employee can create unforeseen complications, particularly when it comes to payroll and tax reporting. Recently, our company faced a challenging situation following the death of one of the owners in December 2023. With a payroll period concluding in 2024, a paycheck was issued posthumously, which included deductions for a 401(k) loan and regular withholdings. Subsequently, a W-2 was generated at the end of January 2024—a step that is typically discouraged for deceased individuals.

As I was not part of the company during this event, I had to navigate this complex situation while assisting with the estate’s tax filing process. This necessitated contacting our payroll service provider to amend the W-2 and issue a 1099 instead. Unfortunately, this amendment led to a journal entry from the payroll provider, resulting in a negative liability in our loan and withholding accounts.

Typically, under more straightforward circumstances, the business would refund these amounts to the estate. However, given the delay between the owner’s passing and the estate’s tax filings, the funds from the individual’s 401(k) were already relocated, which also affected the loan payments and withholdings.

Now, the pressing issue is finding a resolution. Is the solution as simple as posting a journal entry to transfer those amounts from payroll liabilities to payroll expenses? If this is indeed the case, what impact will this adjustment have on the balance sheet, apart from eliminating the negative liability?

Navigating this situation requires careful consideration and possibly consultation with a financial advisor to ensure compliance and accuracy. It is essential to resolve these discrepancies to maintain the integrity of our financial records and uphold our obligations. If you have faced a similar situation, your insights or recommendations would be greatly appreciated. Let’s work together to ensure that we handle these challenging circumstances effectively.