Deceased employee W2 amendment created negative payroll liability – Help?

Title: Navigating Payroll Challenges After an Employee’s Passing: How to Address a W2 Amendment and Negative Liability Issues

Losing an employee is a difficult experience for any organization, and when it comes to payroll management, the complexities can multiply. A recent situation involved an unfortunate case where a company faced an unexpected payroll liability issue due to a W2 amendment for a deceased employee. Let’s delve into the details and explore potential solutions.

The Scenario

At the end of December 2023, the company faced the sad reality of losing one of its owners. Unfortunately, the timing coincided with payroll obligations, as the pay period concluded in late December but was processed in early 2024. A paycheck was issued during this timeframe, with standard deductions, including a 401(k) loan payment, applied accordingly. The following January, a W2 was issued for the deceased individual, a practice that is generally not permissible.

Since the responsible party for handling payroll was not present at the time these events unfolded, the complexities compounded. When the estate began preparing the deceased’s 2023 tax filings, it became necessary to request a W2 amendment from the payroll service provider, along with the issuance of a 1099 in compliance with regulatory requirements.

However, this amendment unexpectedly generated a journal entry (JE) that resulted in negative liabilities within the loan and withholding accounts, complicating the financial landscape further.

Understanding the Implications

Typically, in such cases, the company would refund the necessary amounts to the estate, assuming a more immediate response could have taken place. Yet, due to the intervening time between the employee’s death and the tax filings, the funds from the employee’s 401(k) had already been reallocated, complicating matters regarding the loan repayment and standard withholdings.

Seeking a Solution

The primary question at hand is how best to rectify this negative liability situation. A potential course of action may involve creating a journal entry to transfer these amounts from payroll liabilities to payroll expenses.

Considerations for Adjusting Your Accounts

1. Impact on Financial Statements: Performing such a transaction would effectively clear the negative liability from your balance sheet, bringing it back into a more balanced state. However, consider how this adjustment affects your overall financial picture. It could potentially alter various financial ratios or metrics utilized for decision-making.

2. Consulting with Experts: Due to the complexities involved—particularly as they relate to tax implications and regulatory compliance—consult