Deceased employee W2 amendment created negative payroll liability – Help?

Navigating Payroll Challenges: Addressing a Deceased Employee’s W-2 Amendment Issues

The passing of an employee can lead to complex payroll challenges, as exemplified by a recent situation faced by a company. In December 2023, one of the owners of the business died, which set off a series of complications related to payroll processing and tax reporting.

As fate would have it, the payroll for this deceased employee fell into January 2024, well after his passing. Despite the unfortunate circumstances, a paycheck was still generated for him, inclusive of standard deductions and a 401(k) loan repayment. By the end of January 2024, a W-2 form was issued, despite the common understanding that such documentation should not apply to a deceased individual.

Upon discovering the situation during the estate’s tax filing process, it became necessary to liaise with the payroll service provider to request an amendment of the W-2, transitioning the report to a 1099. However, this amendment initiated a journal entry from the payroll service that resulted in a negative liability in both the loan and withholding accounts.

Under typical circumstances, one would expect a business to reimburse the estate for these amounts. Unfortunately, due to the elapsed time between the owner’s death and the tax filing, the estate had already transferred the funds from the 401(k) accounts, affecting both the loan repayments and regular deductions.

This scenario raises an important question: How can one rectify the negative payroll liability?

A potential solution might involve creating a journal entry (JE) that effectively reassigns these amounts from payroll liabilities to payroll expenses. However, it is crucial to consider the broader impact this may have on the balance sheet. While rectifying the negative liability is a priority, it is essential to assess how such an adjustment might influence financial reporting and Accounting integrity going forward.

In conclusion, navigating payroll and tax obligations in the wake of an employee’s passing can be intricate and requires prompt attention. For any business facing similar challenges, it may be beneficial to seek professional Accounting advice to ensure comprehensive compliance with tax laws and to maintain accurate financial records.