Deceased employee W2 amendment created negative payroll liability – Help?

Navigating Payroll Challenges Following the Loss of a Deceased Employee

Losing a valuable employee is a significant challenge for any organization, and the complexities can multiply when it comes to managing their payroll and tax obligations posthumously. Recently, one of our company owners passed away at the end of December 2023. This set off a cascade of events that led to questions and confusion about employee payroll management in such sensitive situations.

Understanding the Fallout

Complications arose when it came time to issue a paycheck for the final pay period, which fell in early 2024. Although the paycheck was generated, it erroneously included withholdings for a 401k loan payment and other regular deductions. Additionally, the payroll service erroneously issued a Form W-2 for the deceased employee at the end of January 2024, a procedure that, as I learned later, shouldn’t occur after an employee has passed away.

The Corrective Measures Initiated

As part of the process to manage the estate’s tax filing for 2023, I requested that our payroll service amend the W-2 and issue a Form 1099 instead. This led to the payroll service creating a journal entry (JE), unfortunately resulting in a negative balance in both the loan and withholding liability accounts.

In typical scenarios, the business would refund these amounts back to the estate. However, due to the prolonged timeline from the date of death until the tax filings, the estate had already relocated the funds from the employee’s 401k, along with any associated loan payments and deductions.

Seeking Solutions

Now, I find myself seeking guidance on how to rectify this troubling financial situation. The main questions that arise are:

• Would the straightforward method of adjusting a journal entry to transfer the amounts from payroll liabilities to payroll expenses resolve the issue?
• What impact would this adjustment have on our balance sheet beyond simply eliminating the negative liability issue?

Conclusion

It’s vital to approach such payroll matters with precise care, especially in light of the sensitivity involved in handling cases of deceased employees. I encourage any financial professionals who have navigated similar situations to share insights or solutions that would assist in resolving these intricacies. Ensuring that our payroll processes are not only compliant but also respectful of a former employee’s legacy is paramount for maintaining integrity within our organization. Your expertise and suggestions would be greatly appreciated!