Deceased employee W2 amendment created negative payroll liability – Help?

Navigating Payroll Complications After an Employee’s Passing: A Call for Guidance

In the complex landscape of payroll management, the unexpected passing of an employee can lead to challenging situations—especially when it involves the processing of wages and associated tax documents. Recently, a situation arose within a company where the unfortunate death of an employee at the end of December 2023 initiated a domino effect that has left financial discrepancies to untangle.

When the employee passed away, it was the first paycheck of the new calendar year that subsequently led to complications. A paycheck was issued posthumously in January 2024, accompanied by the usual deductions for a 401(k) loan and other withholdings. However, this scenario took a perplexing turn when a W2 form was generated for this deceased employee, a practice which is generally prohibited.

As the current payroll administrator, I was brought in after these events unfolded. While preparing the estate’s 2023 tax filings, it was necessary to engage the payroll service for an amendment of the W2, requesting the issuance of a 1099 form instead, in compliance with established protocols for deceased employees.

However, this amendment led to a journal entry (JE) from the payroll service, resulting in a negative balance on the liability accounts related to the loan and withholdings. Traditionally, if circumstances had permitted, the business would have processed refunds to the estate for these amounts. Yet, due to the significant time lapse between the employee’s passing and the tax filing, the estate had already moved funds from the employee’s 401(k), effectively complicating any potential refunds.

Now, I find myself in a position where I must address these lingering issues. To remedy the negative balances, I am considering whether a simple journal entry could reclassify those amounts from payroll liabilities to payroll expenses.

If this solution is viable, I also seek clarity on the broader implications for our balance sheet. Specifically, besides resolving these negative liabilities, what potential impacts will this adjustment have on our overall financial standing?

While I navigate this complex issue, any insights or experiences shared by others who have encountered similar challenges would be greatly appreciated. This situation serves as a reminder of the intricate nature of payroll management, particularly in sensitive circumstances, and the importance of seeking advice to ensure compliance and accuracy in financial reporting.