Deceased employee W2 amendment created negative payroll liability – Help?

Navigating Payroll Complexities After an Employee’s Passing: Seeking Solutions for W2 Amendments

The passing of an employee can bring about complex challenges in payroll management, particularly when it involves the issuance of W2 forms and the handling of retirement accounts. A recent situation at a workplace exemplifies these challenges, shedding light on the needed actions to rectify payroll-related inconsistencies following a tragic loss.

At the end of December 2023, one of the company’s owners unfortunately passed away. The complication arose when payroll for that pay period, which fell in January 2024, included a paycheck issued posthumously. This check included withholdings for a 401k loan payment and standard deductions—actions that are typically not permissible for deceased individuals. Subsequently, a W2 was generated for this employee in late January 2024, raising concerns about legality and adherence to tax regulations.

Since I was not part of the team during this incident, I found myself needing to address the situation when the estate filed taxes for the deceased employee in 2023. I had to contact our payroll service provider to amend the W2 and ensure a 1099 was issued instead, aligning with appropriate tax guidelines.

The amendment process, however, triggered a journal entry from the payroll service that has now resulted in a negative balance in the liability accounts related to loans and withholdings. The understanding was that, under standard protocols, the company would return these funds to the estate. Yet, due to the significant time that lapsed, the estate had already transferred the employee’s 401k balance elsewhere, thus complicating matters further by moving both the loan payment and regular withholdings along with it.

This brings us to the pressing question: How can we remedy this situation effectively? Would it suffice to make a journal entry to reallocate those amounts from payroll liabilities to payroll expenses? I’m keen to understand the broader implications of this adjustment on the balance sheet, particularly aside from simply resolving the negative liability.

In summary, this experience serves as a reminder of the intricate nature of payroll management posthumously and emphasizes the importance of timely and precise actions in financial reporting and compliance. Any insights or guidance on best practices for rectifying such scenarios would be invaluable. Your expertise is greatly appreciated as we navigate this complex situation.