Deceased employee W2 amendment created negative payroll liability – Help?

Navigating Payroll Complexities After an Employee’s Passing

The passing of an employee can lead to unexpected complications in payroll and tax processes, which can be particularly challenging for those unfamiliar with the intricacies involved. This post outlines a real-world scenario and potential solutions for addressing negative payroll liabilities that may arise after a deceased employee’s W-2 amendment.

The Context

In late December 2023, a key employee of a company unfortunately passed away. The timing of paydays can complicate matters, especially when they fall in the following calendar year. In this instance, the deceased was issued a paycheck in January 2024, which included deductions for a 401(k) loan payment along with other withholdings. Later, a W-2 form was generated by the payroll service, a practice not permitted for deceased individuals, leading to the need for adjustments.

As a newcomer to the company, I faced the challenge of rectifying the situation when the estate of the deceased began filing taxes. It became necessary to request that the payroll service amend the W-2 and issue a 1099 instead. However, this amendment resulted in journal entries that reflected a negative balance in our liability accounts related to the loan and withholdings.

Understanding the Implications

In an ideal scenario, after updating the B-2 form, the business would reimburse the remaining amounts to the estate. Unfortunately, the delay between the employee’s death and the tax filing meant that the estate had already transferred these funds from the employee’s 401(k), which included those deductions for the loan payment and regular withholdings.

Seeking Solutions

Given this situation, a pressing question arises: How can we effectively address the negative liability from the payroll service company?

One approach is to create a journal entry to transfer the outstanding amounts from payroll liabilities to payroll expenses. However, it is essential to consider what this adjustment will mean for your balance sheet. While this action will resolve the negative liability, it may also affect your financial statements by altering the overall view of payroll expenses.

Next Steps

To navigate these complexities with confidence:

1. Collaborate with your Accounting Team: Engaging with accountants or Bookkeeping professionals can provide insights and ensure compliance with tax regulations.

2. Document Everything: Maintain clear records of all transactions and communications with payroll service providers to support your case for adjustments.

3. Consult Legal Advisors: Given the potential complications surrounding estate and tax issues, seeking legal guidance may provide clarity on the