Deceased employee W2 amendment created negative payroll liability – Help?

Navigating Payroll Complications: Resolving a Deceased Employee’s W-2 Amendment Issues

When an employee passes away, it can leave companies grappling with numerous administrative challenges, especially concerning payroll and tax regulations. A recent case highlights some of the complexities involved in properly managing payroll for a deceased worker.

Background Overview
In December 2023, a company owner passed away, creating immediate implications for the payroll process. Although the death occurred in 2023, the pay period’s payday fell in January 2024, resulting in the issuance of a paycheck that included deductions for a 401(k) loan payment and other withholdings. Furthermore, a W-2 was generated for this deceased individual, a practice typically deemed improper.

As someone who wasn’t part of the organization during these events, I encountered a significant issue while assisting with the estate’s tax filings. To rectify the situation, I had to involve our payroll service provider to amend the W-2 and instead issue a 1099, aligning with the tax responsibilities owed by the estate.

The Aftermath
The amendment process resulted in a journal entry (JE) from the payroll service, which mistakenly created a negative liability across the loan and withholding accounts. Ideally, such situations should promptly lead to a refund of the withheld amounts back to the estate. However, due to the considerable time delay between the owner’s passing and the tax filings, the estate had already transferred funds from the employee’s 401(k) accounts, including all related loan payments and withholdings.

The Path to Resolution
Now, the pressing question arises: how do I address this negative liability? Would it be sufficient to create a journal entry that reallocates those amounts from payroll liabilities to payroll expenses? If this adjustment is indeed the answer, it’s vital to consider its implications, particularly on the balance sheet beyond merely eliminating the negative liability.

Conclusion
Management of payroll in the unfortunate event of an employee’s death necessitates diligence and an understanding of the potential ramifications on a company’s finances. Understanding how to navigate these hurdles is essential for any organization, ensuring compliance with tax regulations while maintaining accurate financial records. As you tackle similar payroll issues in your organization, be sure to consult a financial advisor or accountant to navigate these complex situations effectively.