Navigating Payroll Challenges: Addressing W2 Amendments for Deceased Employees

The unexpected passing of an employee can create numerous complications within a company, especially when it comes to payroll and tax reporting. Recently, a troubling situation arose for a company after one of its owners passed away at the end of December 2023. As the new staff member responsible for payroll, I’ve encountered an issue that has raised several questions and requires immediate attention.

The Background

The owner in question received a paycheck during the pay period that fell in January 2024, despite having passed away. This paycheck included deductions for a 401(k) loan payment and regular withholdings. At the end of January 2024, a W-2 was generated for the deceased, which is generally not permissible after an employee’s death.

Since I was not part of the team when this event occurred, I faced a significant challenge during the tax filing for 2023. The estate required me to contact our payroll service provider to amend the W-2 and issue a 1099 instead. Unfortunately, this amendment initiated a journal entry from the payroll service that resulted in a negative liability reflected in both the loan and withholding accounts.

The Complications

Under more straightforward circumstances, one would typically expect that the business would reimburse any erroneous withholdings back to the estate. However, the timeline has complicated matters significantly. The estate had already transferred funds out of the employee’s 401(k) accounts, including the amounts related to the loan and regular withholding.

Addressing the Issue

Now, I am faced with the question of how to rectify the situation. One approach that has emerged is making a journal entry to transfer these negative amounts out of the payroll liabilities and categorize them as payroll expenses. However, I’m concerned about the potential implications this may have on the balance sheet beyond merely resolving the negative liability.

Seeking Guidance

I am reaching out to fellow professionals for advice on the best course of action.
– Is categorizing these amounts as payroll expenses really the right move?
– What effects could this adjustment have on our financial statements?
– Are there alternative methods to better handle this scenario?

Your insights would be invaluable as we work to resolve this payroll complication and ensure our financial records accurately reflect the current situation. Thank you in advance for your help!