Deceased employee W2 amendment created negative payroll liability – Help?

Navigating Payroll Complications After an Employee’s Passing: A Guide to Resolving Negative Liabilities

The unfortunate passing of an employee often presents numerous administrative challenges, particularly when it comes to payroll and tax filings. A recent situation involving a deceased employee has prompted a need for clarification and guidance on handling payroll liabilities effectively.

The Scenario

At the end of December 2023, one of our company’s owners passed away. The subsequent payday in early 2024 resulted in the issuance of a paycheck that included standard deductions, such as a 401(k) loan payment. Additionally, a W-2 form was generated for the deceased employee in January 2024, which, according to IRS regulations, is not permissible posthumously.

As someone who was not employed during these transactions, I had to navigate the complexities of amending the W-2 and requesting the payroll service to issue a 1099 form instead. This amendment process subsequently led to a journal entry (JE) from the payroll service, creating a negative liability in our Accounting records related to loan and withholding accounts.

Complicating matters further, the timeline between the employee’s death and the tax filings resulted in the estate’s premature withdrawal of funds from the employee’s 401(k) accounts, including the deducted loan and regular contributions.

Seeking Resolution

Now, I’m tasked with addressing this negative payroll liability. The essential questions are: How do we rectify this situation? And what implications will the resolution have on our financial statements?

Proposed Solution

One potential solution to alleviate the negative liability is to create a journal entry that reallocates these amounts from the payroll liabilities to payroll expenses. This entry would effectively clear out the negative liabilities but raises concerns about its impact on the overall balance sheet.

Implications of the Proposed Entry

By moving the amounts to payroll expenses, we would essentially acknowledge the costs incurred without expecting reimbursement, thus reflecting a more accurate financial picture of our accounts. However, this action will increase our payroll expense line and could potentially alter budget forecasts or profitability assessments.

Final Thoughts

Handling payroll after an employee’s passing requires meticulous attention to detail and an understanding of Accounting principles. Engaging with a knowledgeable accountant or payroll professional is advisable to ensure compliance with all regulations and to avoid further complications.

If you’ve faced similar challenges or have insights into effective resolutions, your experiences could be invaluable to others navigating these tough situations in their businesses.