Deceased employee W2 amendment created negative payroll liability – Help?

Tackling Payroll Liability Issues After an Employee’s Passing: A Step-by-Step Guide

The death of an employee can introduce a myriad of complexities into payroll and Accounting processes, especially when tax documentation is involved. A recent case has shed light on such challenges—demonstrating the intricacies of handling payroll liabilities when faced with the unfortunate passing of a team member.

The Situation at Hand

At the end of December 2023, one of the company’s owners sadly passed away. As fate would have it, the pay period concluded in December, but payday fell in January 2024. The deceased was issued a paycheck that included deductions for a 401(k) loan repayment and standard tax withholdings. Additionally, a W-2 was generated at the end of January 2024—something that’s not typically permissible for individuals who are no longer living.

Since the current payroll administrator was not on-site during this period, they encountered hurdles when the deceased’s estate began preparing for tax filings. Consequently, there was a necessary request for the payroll service to amend the W-2 and issue a 1099 form instead.

The Consequences of the W-2 Amendment

This W-2 amendment led to a journal entry (JE) from the payroll service, creating an unfortunate negative liability in both the loan and withholding accounts. Typically, one would expect that any overpayments would be refunded to the estate of the deceased employee, but complications arose. The estate had already transferred funds from the employee’s 401(k) accounts, further complicating the situation.

Seeking a Solution

The pressing question now is: how can one effectively remedy this Bookkeeping dilemma?

1. Adjusting Journal Entries: The first step could be to make a journal entry that reallocates the amounts from payroll liabilities to payroll expenses. Such a move would essentially nullify the negative liability appearing on the balance sheet.

2. Balance Sheet Considerations: It’s important to recognize the impact of these adjustments. While clearing out the negative liability would improve the balance sheet’s appearance, it’s crucial to evaluate how these entries affect overall expenses and the bottom line.

3. Consulting with a Professional: Given the complexities involved, it might be wise to consult with a payroll specialist or an accountant experienced with such issues. They can offer tailored advice on navigating these payroll intricacies while ensuring compliance and accuracy in financial reporting.

In conclusion, while this scenario showcases the challenges that arise in payroll management