Deceased employee W2 amendment created negative payroll liability – Help?

Navigating Payroll Challenges After the Passing of an Employee

Losing an employee is a difficult moment for any business, not only emotionally but also from an administrative standpoint. Recently, our organization faced a complex payroll issue following the unexpected passing of one of our owners at the close of December 2023. This situation has prompted a need for clarity, especially regarding tax filings and financial liabilities.

The Situation at Hand

In the wake of the owner’s passing, a paycheck was issued for the final payroll period, which landed in early January 2024. This paycheck included standard deductions, such as a 401(k) loan repayment. In January, a W-2 was produced for this deceased employee, which I learned is generally prohibited.

As a newcomer to the team, I wasn’t present during this payroll sequence. However, I was tasked with addressing the tax filings for the deceased’s estate. This necessitated reaching out to our payroll service provider to amend the W-2, and instead issue a 1099 form.

Unfortunately, the amendment created a journal entry reflecting a negative liability within our payroll accounts, affecting both the withholding and loan liability records.

The Liabilities Left Behind

It’s my understanding that under typical circumstances, the company would resolve these discrepancies by refunding the identified amounts back to the estate. However, a significant delay had occurred. By the time we attempted to address the tax filing, the estate had already transferred funds out of the owner’s 401(k), along with the associated loan repayments and regular deductions.

Now, I’m faced with the task of rectifying these financial discrepancies. The question arises—what is the most effective way to handle this negative liability?

Finding a Solution

One potential remedy could be to create a journal entry (JE) to transfer those amounts from the payroll liability accounts into payroll expense accounts. This adjustment could eliminate the negative balance present in our liabilities. However, it is crucial to understand the implications of this transaction on our balance sheet beyond simply clearing the negative account.

Conclusion

Correctly managing payroll-related issues, especially those involving deceased employees, requires attention to detail and a solid understanding of Accounting practices. If you’re navigating a similar situation, it may also be beneficial to consult with a financial professional or a payroll expert. Their guidance can help ensure compliance while also maintaining the integrity of your financial records.

As we continue to seek resolution and clarity in this matter, sharing experiences and insights can be invaluable. If you’ve encountered