Deceased employee W2 amendment created negative payroll liability – Help?

Title: Navigating Payroll Challenges After the Loss of an Employee: A Comprehensive Guide

The unfortunate passing of an employee can introduce a myriad of complications in payroll and taxation processes, especially when it occurs near the end of the fiscal year. This scenario became a reality for our organization when one of the company’s co-owners passed away in late December 2023. The circumstances surrounding this event and the subsequent payroll issues offer valuable insights into managing similar challenges effectively.

The Background

As the new member of the team, I found myself dealing with the aftermath of a complex situation that predates my employment. Following the employee’s death, a paycheck was issued in January 2024, which included regular deductions and a payment related to a 401k loan. This resulted in the issuance of a W-2 for the deceased, raising questions about compliance with IRS regulations concerning deceased individuals.

Upon conducting further investigation for the estate’s tax filings, it became evident that the W-2 issued was not appropriate for an employee who had passed away. Consequently, I requested our payroll service provider to amend the W-2 and produce a 1099 instead, which is standard protocol in such cases.

The Complications

The amendment process, however, was not without its complications. Our payroll service created a journal entry that inadvertently resulted in negative liabilities within our loan and withholding accounts. Ideally, had the estate filed taxes in a timely manner, any outstanding amounts would have been refunded back to the estate. Unfortunately, by the time the amendment was processed, the estate had already moved funds from the employee’s 401k account, affecting the loan payments and regular deductions connected to those accounts.

Addressing the Issues

What we now face is a pressing question: How do we rectify this situation efficiently? One potential solution involves making a journal entry to transfer the negative amounts from payroll liabilities to payroll expenses.

Implications of Adjustment

When making such adjustments, it’s essential to understand the broader implications for your balance sheet. Rectifying the negative liability on our accounts would help streamline our records and improve our financial outlook. However, it is crucial to note that moving these amounts would also affect our profitability metrics, potentially leading to additional questions during audits.

Next Steps

To conclude, navigating payroll after the loss of an employee can be intricate and requires attention to detail. Working closely with your payroll service provider and possibly seeking legal or financial counsel can ensure compliance and help clear up any discrepancies. Whether you choose