Deceased employee W2 amendment created negative payroll liability – Help?

Navigating Payroll Challenges After an Employee’s Passing

The loss of an employee is always a difficult situation for any company, both personally and operationally. Unfortunately, challenges can arise long after the employee’s passing, as one company recently discovered. Here, we delve into a complex scenario involving payroll liabilities and tax implications that can occur when an employee passes away close to year-end.

The Situation

An unexpected event unfolded at a company when one of its owners passed away in late December 2023. Due to the timing of his death, payday for that final work period fell in January 2024. He was processed for this pay period, receiving a paycheck that included deductions for a 401k loan and regular withholdings. At the end of January 2024, a W-2 form was issued for the deceased employee, which raised questions about compliance since tax regulations generally prohibit issuing W-2 forms for individuals who have passed away.

Addressing the Issue

With the estate preparing to file the deceased’s 2023 taxes, it became necessary to amend the W-2 to align with regulatory standards, opting instead to issue a 1099. This amendment stirred complications, resulting in a journal entry from the payroll service provider that inadvertently created a negative liability in both the loan and withholding liability accounts.

The complexity deepened due to the time elapsed since the employee’s death, with the estate having transferred funds from the 401k accounts to another account. Consequently, the associated loan payment and withholdings were also shifted, leaving the payroll department in a quandary about how to rectify the Accounting records.

Seeking Solutions

The question that arose was how to address these negative liabilities effectively. One potential solution involves creating a journal entry (JE) to transfer these amounts from the payroll liabilities into payroll expenses. However, this leads to further considerations regarding the impact on the balance sheet and overall financial statements.

Impact on Financial Records

Making such an adjustment could simplify the Accounting by eliminating the negative liability. Still, it is essential to weigh the consequences of this transition. Adjusting these entries may raise red flags during audits or financial reviews, as they could alter the perceived liability status of the company.

To ensure clarity and compliance, it may be prudent to consult with a CPA or a financial advisor familiar with payroll regulations and estate matters. Their expertise can provide guidance on the best course of action to resolve the issue while maintaining accurate financial records.

Conclusion

In the face