Deceased employee W2 amendment created negative payroll liability – Help?

Navigating Payroll Complications for a Deceased Employee: A Guide to Amending W2s and Handling Liabilities

As business owners, we often face unexpected challenges, particularly when it comes to payroll and employee matters. A recent situation that has emerged involves the complexities surrounding a deceased employee’s payroll, which can lead to confusion and potential financial discrepancies.

The Situation at Hand

In December 2023, our company experienced the unfortunate loss of one of its owners. Following the owner’s passing, a paycheck was issued for the final pay period, which occurred in early 2024. This paycheck included standard deductions, such as loan repayments for a 401(k) plan. However, the intricacies of payroll Accounting became apparent when it came time to issue a W2 for this employee at the end of January 2024.

It has come to our attention that issuing a W2 in this case might not align with established guidelines, chiefly because the employee had passed away prior to the issuance. As I was not part of the organization when this occurred, I sought the assistance of our payroll service to amend the W2 documentation, transitioning the classification of earnings to a 1099 for the estate’s tax filings.

The result of this amendment triggered a journal entry (JE) from our payroll service, leading to a negative balance in our loan and withholding liability accounts. Given the elapsed time since the owner’s death and the subsequent withdrawal of funds from the 401(k) by the estate, we are now left with a perplexing scenario that requires rectification.

Finding a Solution

The question arises: how do we rectify this unintended negative liability? One potential solution involves adjusting the Accounting entries to reflect the current state of affairs accurately. This can often be done by making a journal entry to transfer the amounts from the payroll liabilities to payroll expenses.

Implications of the Adjustment

By making this adjustment, we will be clearing the negative liability and ensuring our balance sheet accurately reflects our financial position. However, it is essential to consider the broader effects this may have on our accounts:

1. Balance Sheet Adjustment: This action will effectively remove the negative liability, thereby updating our financial statements to represent a more accurate picture of our obligations.

2. Expense Impact: Transferring these amounts to payroll expenses will increase our overall expenses for the period, which could affect profitability and financial analysis.

3. Tax Considerations: It is advisable to consult with a tax professional to understand the implications