Deceased employee W2 amendment created negative payroll liability – Help?

Resolving Payroll Liability Issues After the Passing of an Employee

In the complex world of payroll and taxation, navigating the aftermath of an employee’s death can pose unique challenges. A recent case brought to light highlights the complications that can arise in handling payroll amendments for a deceased employee. Let’s delve into the issue and explore potential solutions.

The Situation: A Complicated Payroll Amendment

In late December 2023, a company owner sadly passed away. Following the normal payroll schedule, a paycheck was issued for the final pay period, which included standard deductions and a loan repayment for a 401(k). However, complications arose when a W2 form was generated at the end of January 2024, a practice that is generally not permitted for individuals who have passed away.

As a new member of the payroll department, my role became critical when the time came for filing the deceased’s tax returns through the estate. It became necessary to request an amendment to the W2 from the payroll service, thereby issuing a 1099 instead to ensure compliance with IRS regulations.

The Consequences: A Negative Payroll Liability

Following the amendment, the payroll service issued a journal entry (JE) that resulted in a negative liability in both the 401(k) loan and withholding accounts. Typically, under standard circumstances, the business would refund these amounts to the estate promptly. However, due to the time lapse between the employee’s passing and the tax filing, the estate had already transferred funds from the deceased employee’s 401(k) into another account. Consequently, the standard loan repayment and withholding deductions had also been relocated.

Finding a Solution: Clearing Up Negative Liabilities

Now, the pressing question remains: how can we rectify these negative liability amounts? One potential solution is to create a journal entry that reallocates the amounts from the payroll liabilities to payroll expenses. By doing so, we may clear the negative balances on the liability accounts effectively.

But what impact will this adjustment have on your balance sheet? Aside from eliminating the negative liabilities, this process will ultimately reflect a more accurate representation of payroll obligations. Keep in mind, any changes made will influence the overall equity and financial position of the company.

Next Steps

1. Consult with Your Accounting Professional: Before making any adjustments, it’s wise to seek guidance from an Accounting professional or financial advisor to ensure proper handling of this sensitive situation.

2. Document Everything: Ensure thorough documentation of the changes made to maintain transparency and accuracy in your