Deceased employee W2 amendment created negative payroll liability – Help?

Navigating Payroll Complications After the Loss of an Employee

The passing of an employee can present numerous challenges for a business, particularly when it comes to payroll and tax procedures. Such is the case for one company facing difficulties related to the W-2 form issued to an employee who unfortunately died at the end of December 2023.

The Situation at Hand

In this instance, the employee’s final paycheck was processed in 2024, which included deductions for a 401(k) loan as well as regular withholdings. At the end of January 2024, a W-2 was prepared for the deceased employee. However, it’s generally prohibited to issue a W-2 for anyone who has passed away.

Upon discovering this oversight, the company took the necessary steps to amend the W-2 through their payroll service provider to ensure proper tax filing by the employee’s estate. This was particularly crucial as the estate was in the process of filing taxes for 2023.

The Aftermath of the Amendment

However, the subsequent amendment resulted in a journal entry (JE) from the payroll service that led to a negative balance in the accounts related to loan obligations and withholding liabilities. Normally, under timely circumstances, the business would refund these amounts to the deceased’s estate. Yet, due to the passage of time and the estate’s prior movement of funds from the employee’s 401(k) into another account, complications arose regarding the handling of these amounts.

Seeking Solutions

The pressing question now is, how should the company resolve this financial discrepancy? One potential resolution could involve creating a journal entry that reallocates the negative liability amounts from payroll liabilities to payroll expenses.

Implications on Financial Statements

While this adjustment might simplify the liability accounts by clearing out the negative balances, it’s essential to understand the broader implications this action would have on the company’s balance sheet. Shifting these amounts to payroll expenses would increase the company’s overall expenses, potentially impacting profitability metrics for the period in which the adjustment is made.

Conclusion

In dealing with the aftermath of an employee’s passing and the associated payroll errors, it’s vital to proceed carefully and consider all ramifications of any Accounting adjustments made. Consulting with a financial professional or accountant familiar with payroll processing and tax obligations for deceased employees can provide further clarity and assist in resolving such issues smoothly.

This incident serves as a reminder of the importance of diligence and accuracy in payroll practices, particularly in sensitive situations like these.