Deceased employee W2 amendment created negative payroll liability – Help?

Navigating Payroll Liabilities After the Passing of an Employee: A Guide for Employers

Dealing with payroll issues can be a daunting task, especially when an employee passes away unexpectedly. This can lead to complex scenarios that require timely and careful handling. A recent situation involving the unfortunate demise of an employee at the end of December 2023 exemplifies some of the challenges businesses may face.

The Situation

In this case, the company’s owner died at the close of 2023, with the last payday for that pay period falling in January 2024. Despite his passing, a paycheck was issued for that pay period, which included deductions for a 401(k) loan and standard withholdings. Subsequently, a W-2 form was generated at the end of January 2024, which, according to regulations, should not have occurred for a deceased employee.

As this situation unfolded, a new employee was tasked with managing the deceased’s 2023 tax filings through the estate. This required reaching out to the payroll service provider to amend the W-2 and instead issue a 1099 form, allowing the estate to correctly report taxable income.

The Fallout

However, the amendment of the W-2 led to a journal entry from the payroll service that left a negative balance in the liability accounts for the loans and withholdings. Typically, under ideal circumstances, the business would reimburse the estate for these amounts. Yet, due to the delay between the employee’s death and the tax filings, the estate had already transferred the funds from the employee’s 401(k) into another account, thereby complicating the loan repayment and withholding situation further.

Seeking Solutions

To resolve these outstanding liabilities, it’s essential to consider the following steps:

1. Assess the Situation: Review the journal entries and the negative liabilities to understand their impact on your accounts comprehensively.

2. Adjust Journal Entries: Moving the amounts in question from payroll liabilities to payroll expenses may be a feasible solution. This adjustment would effectively clear the negative liability on your balance sheet.

3. Understand Financial Implications: While reallocating the amounts will eliminate the negative figures from your payroll liabilities, it’s crucial to evaluate how these changes affect your overall financial reporting and balance sheet. Such adjustments will shift these amounts into operational costs, potentially impacting profitability figures for the reporting period.

4. Documentation: Keep thorough records regarding the changes made and the rationale behind them for future audits and financial reviews