Deceased employee W2 amendment created negative payroll liability – Help?

Title: Navigating Payroll Liabilities and Amendments After the Passing of an Employee

When faced with the unfortunate situation of an employee’s passing, especially when it occurs close to a fiscal year-end, employers can encounter complex payroll dilemmas. A recent scenario illustrates this challenge, highlighting the need for proper amendments and the potential consequences for company Accounting.

In late December 2023, the unexpected death of a company owner sparked a series of payroll complications. Although the payroll period concluded in 2023, the paycheck for that term was processed in January 2024. This paycheck included standard deductions, such as a 401(k) loan payment. Upon year-end, a W-2 was issued for this income, a move that raised questions about its validity after the employee’s demise.

As someone who was not part of the company during these events, I found myself tasked with a critical correction as the estate filed the deceased’s 2023 taxes. I reached out to our payroll service provider to amend the W-2 and facilitate the issuance of a 1099, which is typically appropriate for deceased individuals.

However, this W-2 amendment generated a journal entry from the payroll service that resulted in a negative balance in both the loan and withholding liability accounts. Traditionally, if handled promptly, such overpayments are refunded to the estate. Unfortunately, the time lapse between the employee’s passing and the estate’s tax filing complicated matters further, as the funds from the employee’s 401(k) had already been transferred to a different account. Consequently, both the loan payment and regular deductions were also relocated.

The pressing question now is how to resolve this lingering negative liability. Would it suffice to create a journal entry to reclassify these liabilities as payroll expenses? Furthermore, what impact will this correction have on our balance sheet beyond simply clearing the negative figures?

Understanding these intricacies is crucial for maintaining accurate financial records and ensuring compliance with tax regulations. It may be beneficial to consult with a financial advisor or accountant familiar with payroll laws in the wake of a deceased employee to ensure all actions align with legal requirements and best practices.

In conclusion, while navigating payroll after an employee’s death can be daunting, addressing these issues expediently and accurately is essential to uphold the integrity of your company’s financial statements.