Deceased employee W2 amendment created negative payroll liability – Help?

Resolving Payroll Liability Issues After the Passing of an Employee

Navigating payroll complications following the death of an employee can be a daunting task for any business. This scenario became an issue when one of our company’s owners passed away at the close of December 2023.

During the first paycheck issuance in 2024, the deceased received a paycheck that included deductions for both a 401(k) loan repayment and standard payroll deductions. Compounding this confusion, a W-2 was generated for the individual at the end of January 2024, a practice typically not permitted for deceased persons.

As I was not part of the team when this unfortunate event occurred, I had to ask our payroll service provider to amend the W-2 and issue a 1099 in order to appropriately address the deceased’s final tax obligations. However, this amendment resulted in a journal entry (JE) from the payroll company that has introduced a negative liability in both the loan and withholding liability accounts.

In most situations, one would expect the business to refund the amounts owed to the estate in a timely manner. However, given the time that has elapsed between the employee’s death and the tax filings, the estate has already relocated the funds from the employee’s 401(k) accounts to a different account. As a result, both the loan repayment and the regular withholding amounts are also untraceable.

So the question remains: how do we rectify this issue?

The solution may lie in creating a simple journal entry to shift these amounts from payroll liabilities to payroll expenses. But what implications will this adjustment have on our balance sheet, aside from eliminating the negative liability?

Understanding the ramifications of this fix is crucial. By moving these amounts to payroll expenses, we not only clear out the negative liability but also impact our overall financial picture. The payroll expenses will increase, which could affect net income for the reporting period. However, it helps to maintain accurate records and reflect the true financial obligations of the business.

If you find yourself in a similar predicament, consulting with a financial professional or an accountant is advisable. They can provide tailored guidance for your specific situation, ensuring compliance and accuracy in your financial records moving forward.

Dealing with payroll processes associated with deceased employees can be challenging, but with the right knowledge and strategies, it’s possible to navigate these complex situations effectively.