Navigating Payroll Challenges After a Deceased Employee: Seeking Guidance on W2 Amendments

In late December 2023, our company faced an unfortunate event with the passing of one of our owners. As the new accountant (having started after these events unfolded), I have encountered a complex issue related to payroll and tax filings that I need assistance with.

During the final pay period of 2023, which fell into 2024 for payday processing, the deceased employee received a paycheck. This paycheck included deductions for a 401k loan and regular withholdings. Subsequently, a W2 was issued for him at the end of January 2024, a practice that I have since learned is not permissible for individuals who are deceased.

As the estate began to file taxes for the deceased, I had to liaise with our payroll service provider to amend his W2 and ensure that a 1099 was issued instead. However, this amendment resulted in a journal entry from the payroll service that left us with a negative balance in our loan and withholding liability accounts.

From what I’ve gathered, in more timely circumstances, the company would typically refund these amounts to the estate. Unfortunately, due to the delay between the employee’s passing and tax filing, the estate facilitated moving funds from the employee’s 401k into different accounts. This transition also impacted the loan payment and regular withholdings.

Now, I find myself needing a solution. One possible approach I’ve been considering is making a journal entry to transfer these amounts from payroll liabilities to payroll expenses. Before proceeding, though, I have a few questions:

1. Is this transfer of amounts from liabilities to expenses sufficient to resolve the issues?
2. What implications will this correction have on the balance sheet beyond just eliminating the negative liability?

I’m eager for any insights or advice from those who might have dealt with similar payroll complications after an employee’s death. Thank you in advance for your guidance!