Deceased employee W2 amendment created negative payroll liability – Help?

Navigating Payroll Challenges After the Loss of an Employee: A Case Study

The unexpected loss of an employee can bring about a myriad of challenges for a business, particularly in managing payroll and tax-related issues. A recent situation highlights the complexities that can arise when a company experiences the passing of a team member, especially related to payroll processing and W-2 reporting.

The Background

At the conclusion of December 2023, one of the company’s owners sadly passed away. Although the individual was deceased by the time payday rolled around in January 2024, a paycheck was still issued reflecting loan payments from their 401(k) and regular deductions. This paycheck also resulted in a W-2 form being generated at the end of January 2024, which, as it turns out, is not permissible for a deceased individual.

Given that I was not part of the team during this process, I faced the challenge of ensuring the estate’s tax filings for 2023 were completed accurately. This involved reaching out to our payroll service provider to amend the W-2 and instead issue a 1099 form.

The Complications

Upon amending the W-2, the payroll service provider generated a journal entry (JE) that led to a negative liability being recorded in both the loan and withholding accounts. Normally, when circumstances allow, these amounts would be refunded to the estate. However, due to the time that had elapsed since the employee’s passing and the subsequent tax filing, the estate had already transferred funds from the 401(k) accounts. Consequently, the related loan payments and withholding deductions became problematic.

Seeking Solutions

Now faced with the question of how to rectify this situation, I ponder: Is the solution as straightforward as creating a journal entry to reclassify these amounts from payroll liabilities to payroll expenses? If this adjustment is indeed viable, what implications would that have on my balance sheet beyond simply eliminating the negative liability?

Steps Forward

1. Review the Negative Liabilities: Begin by examining the specific accounts impacted and confirm the amounts that need to be adjusted.

2. Consult with Financial Advisors: Engage with a certified accountant or tax advisor well-versed in payroll and estate handling to ensure compliance and accuracy in your financial records.

3. Journal Entry Adjustments: If deemed appropriate, create a journal entry to transfer the negative liabilities to payroll expenses. Document the reasons for this adjustment thoroughly for future reference.

4. **Monitoring Future Payroll Processes