Deceased employee W2 amendment created negative payroll liability – Help?

Title: Navigating Payroll Challenges After the Passing of an Employee

When managing payroll, unexpected challenges can arise, especially in the unfortunate event of an employee’s passing. Recently, I encountered a complex situation that required careful navigation involving amendments to an employee’s W2 after their death.

At the end of December 2023, one of our company owners passed away. Unfortunately, the payday for that final pay period fell in January 2024, leading to the issuance of a paycheck from which a 401(k) loan payment and standard deductions were withheld. Following this, a W2 was issued in January 2024—a process that I have learned is generally not permissible for deceased individuals.

As someone who was not present during this period, I faced the task of ensuring that the estate’s 2023 taxes were filed appropriately. This involved requesting an amendment to the W2 from our payroll service provider, which resulted in the issuance of a 1099 instead. However, this amendment created an unexpected journal entry (JE) from the payroll service that resulted in negative liabilities in our loan and withholding liability accounts.

While I understand that typically, a business would refund any amounts back to the estate under timely circumstances, in this case, significant time had passed. The estate had already moved funds from the deceased’s 401(k) accounts, which included the loan payment and withholding amounts.

Now, I find myself tackling the question: how do I rectify this situation?

I’m considering whether I can simply execute a journal entry to transfer those amounts from payroll liabilities to payroll expenses. If that’s the course of action, I would like to understand how this adjustment might impact my balance sheet beyond just resolving the negative liability issue.

This situation highlights the complexities involved in payroll management, particularly in sensitive circumstances. I am keen to hear thoughts from anyone else who has navigated similar dilemmas or can provide insight into how best to address these Accounting challenges. Your expertise and experiences will be invaluable as I work towards resolving this matter efficiently.