Deceased employee W2 amendment created negative payroll liability – Help?

Addressing Payroll Challenges After the Loss of an Employee: Understanding W2 Amendments and Liability Adjustments

Navigating payroll procedures can be particularly complex when dealing with the sad passing of an employee. A recent scenario sheds light on the issues that can arise from payroll liability adjustments following the death of a staff member.

In late December 2023, a valued owner of a company tragically passed away. Unfortunately, during his final pay period, which extended into January 2024, a paycheck was issued. Deductions were taken for standard expenses, including 401(k) loan repayments. By the end of January 2024, the deceased was issued a W-2, which, as many are aware, is typically prohibited for individuals who have passed away.

As I had not yet joined the company at that time, the responsibility of addressing this situation fell to me when the estate began processing the tax filings for 2023. I reached out to the payroll service provider to request an amendment to the W-2 and to issue a 1099 instead.

Unfortunately, the amendment resulted in a journal entry by the payroll service that created a negative liability within our 401(k) loan and withholding accounts. Under normal circumstances, it would be expected that the business would issue a refund of these amounts to the deceased’s estate. However, due to the passage of time between the employee’s death and the tax filing, the estate had already transferred the funds from his 401(k) into a different account, along with the corresponding loan payment and withholdings.

This situation raises a critical question for our Accounting practices: How do we rectify the negative liability created by this amendment?

One potential solution could be to create a journal entry that reallocates these amounts from the payroll liabilities to payroll expenses. However, before proceeding, I need to consider the broader implications of such a move. Specifically, what impact will this adjustment have on our balance sheet? Clearing out the negative liability is necessary, but we must ensure that our financial records remain accurate and compliant.

In summary, the unfortunate death of an employee can lead to a variety of complex Accounting challenges. As we work to resolve this issue, seeking expert advice and maintaining diligent records will be essential in navigating the aftermath and ensuring we are on the right path. If you find yourself in a similar situation, consulting with a financial professional who understands payroll regulations surrounding deceased employees can be invaluable.