Deceased employee W2 amendment created negative payroll liability – Help?

Navigating Payroll Challenges After an Employee’s Passing: Seeking Guidance

Handling payroll and tax matters can be a complex undertaking, especially when unforeseen circumstances, such as the death of an employee, come into play. A recent situation has shed light on the intricacies of this process, prompting inquiries about how to correctly address the resulting complications.

The Scenario

At the close of December 2023, a company owner unexpectedly passed away. As the new team member managing payroll, I learned that during the last pay period, which technically fell in 2024, the deceased was issued a paycheck that included withholdings for a 401(k) loan payment and standard deductions. To complicate matters further, a W-2 was generated for him at the end of January 2024. This situation raised a crucial question: Is it permissible to issue a W-2 for someone who has passed away?

Complications Arise

While I was not part of the team during the original incident, I was tasked with assisting the estate’s filing of the deceased’s 2023 taxes. To ensure accuracy, I approached our payroll service provider to amend the W-2 and provide a 1099 instead, aligning with the correct procedures for handling deceased employees.

However, following the W-2 amendment, a journal entry (JE) from the payroll service resulted in negative balances in our loan and withholding liability accounts. Traditionally, one might expect that any excess funds would be refunded to the estate. Unfortunately, due to delays in the filing process, the estate had already transferred funds from the employee’s 401(k) account, including the loan repayment and standard withholdings.

Seeking a Solution

Now, the pressing question is: how can this situation be rectified? One potential solution involves making a journal entry to adjust the amounts from the payroll liability accounts to payroll expenses. However, it’s essential to understand the implications this adjustment may have on our balance sheet. Beyond merely clearing the negative liability, such changes could impact overall financial reporting.

Moving Forward

I’m reaching out to fellow professionals for insights and advice on how to address this complex issue effectively. Has anyone encountered a similar situation? How did you navigate the corresponding adjustments, and what were the long-term implications on your financial records? Your expertise would be invaluable in ensuring that we manage this unforeseen situation correctly and efficiently.

Thank you in advance for your guidance!