Deceased employee W2 amendment created negative payroll liability – Help?

Navigating Payroll Liabilities for a Deceased Employee: A Comprehensive Guide

In an unfortunate turn of events, one of the company owners passed away at the end of December 2023. Compounding this tragedy was the payroll processing that followed, which involved complexities around W-2 forms and existing retirement accounts. If you’re in a similar situation, here’s a breakdown of how to address these challenging payroll liabilities.

The Scenario

As of January 2024, the deceased owner had already received a paycheck for the last pay period of 2023. This payment included standard payroll deductions, including a 401(k) loan repayment. By the end of January 2024, a W-2 was issued for this individual, a process that raises questions since W-2 forms should not be generated for deceased individuals.

Since I was not part of the company during this payroll cycle, when it came time to file taxes for 2023 for the owner’s estate, I engaged our payroll service provider to amend the W-2 and to issue a 1099 instead.

The Consequences of Amendment

Unfortunately, amending the W-2 resulted in a journal entry (JE) from the payroll service that has now created a negative liability in the accounts related to loan payments and withholdings. Typically, the next step in a case like this would involve refunding those amounts back to the estate. However, due to the significant delay in transitioning the beneficiaries’ 401(k) funds and associated payroll deductions into other accounts, the situation has become more complicated.

Seeking Solutions

This leaves us with pressing questions: How do I rectify this negative liability? Is the solution as straightforward as making a journal entry to transfer these amounts from payroll liabilities to payroll expenses? If so, what repercussions could this adjustment have on our balance sheet, apart from eliminating the negative balance?

Addressing the Issue

To resolve these payroll discrepancies, here’s a step-by-step guide:

1. Consult Your Accountant: Before making any journal entries, engage with your Accounting team or a financial advisor. They will provide tailored guidance based on your company’s specific financial situation.

2. Creating the Journal Entry: If you do proceed with creating a journal entry, you will essentially be moving the liabilities incurred from the payroll transactions to expense accounts. This transfer will clear out the negative balance, allowing the financial records to reflect accurate liability.

3. Impact on Financial Statements: Adjusting these