Deceased employee W2 amendment created negative payroll liability – Help?

Addressing Payroll Complications After a Deceased Employee’s W-2 Amendment

Dealing with payroll matters is often intricate, and when a deceased employee is involved, the situation can become even more complex. Recently, one of the owners of a company tragically passed away at the end of December 2023. The payday for the involving pay period occurred in 2024, resulting in a paycheck for the deceased employee. This paycheck included deductions for a 401(k) loan repayment and other standard withholdings. Compounding the issue, a W-2 was issued for this individual at the end of January 2024, which raised concerns regarding compliance since tax forms should not be issued for deceased persons.

As someone who arrived at the company only after these events unfolded, I encountered challenges when the estate began filing the deceased employee’s 2023 taxes. To ensure proper handling, I contacted our payroll service to request an amendment of the W-2 and the issuance of a 1099 form instead. However, this amendment resulted in a journal entry from the payroll service, leaving us with negative balances in both the loan and withholding liability accounts.

Typically, in such cases, one would expect the company to refund any overwithheld amounts to the estate. Unfortunately, time constraints following the employee’s death and the subsequent tax filings meant that funds from the deceased’s 401(k) accounts had already been moved elsewhere, along with the associated loan repayment and withholdings.

This raises the pressing question: How can this issue be resolved?

The potential solution appears to involve making a journal entry to transfer the amounts from payroll liabilities to payroll expenses. However, before proceeding, one must consider the implications of this adjustment on the company’s balance sheet. While clearing the negative liability is a necessity, it is equally important to understand how this shift will affect overall financial reporting.

To tackle this situation effectively, consulting with a financial professional or your accountant would be prudent to ensure that the ledger reflects accurate amounts while adhering to regulatory obligations. Taking these steps can help you navigate this challenging scenario while maintaining clear and compliant financial records.