Deceased employee W2 amendment created negative payroll liability – Help?

Title: Navigating Payroll Challenges After the Passing of an Employee: A Guide for Business Owners

Losing an employee is never easy, and the complexities of payroll and tax obligations that follow can add to the heartbreak of such a loss. In this blog post, we explore a real-world scenario in which a company’s payroll processes became entangled with the unfortunate death of a key employee, leading to some financial headaches. If you find yourself in a similar situation, here’s how to address and resolve those issues effectively.

The Situation

At the end of December 2023, one of the owners of a company passed away. While payday for the corresponding pay period occurred in January 2024, the deceased employee was prepared to receive a paycheck that included deductions for both a 401k loan and standard payroll withholdings. Compounding the issue, a W2 form was issued at the end of January 2024, which unfortunately is not compliant with regulations for deceased individuals.

As the new payroll administrator, I was faced with rectifying the situation during the estate’s tax filing. It became necessary to collaborate with the payroll service company to amend the W2 and correctly issue a 1099 form. However, this amendment generated a journal entry (JE) from the payroll service that inadvertently resulted in negative liabilities in both the loan and withholding accounts.

Complications Arise

Typically, it is expected that businesses would refund the estate for these withheld amounts in a more timely manner. Unfortunately, considerable time had passed since the employee’s passing and the subsequent tax filings. As a result, the estate had already transferred funds from the employee’s 401k accounts into alternate accounts, along with the corresponding loan payment and withholding deductions.

Seeking Solutions

Now, the pressing question is: How do we resolve these negative payroll liabilities? One potential approach could involve creating a journal entry to move the amounts from the liability accounts to payroll expenses. However, it’s essential to understand the broader implications of this action.

Understanding the Impact on Your Balance Sheet

Making such adjustments may effectively clear the negative liabilities from your balance sheet, but it also prompts further considerations:

1. Reflecting Accurate Financial Position: By moving these amounts to payroll expenses, you ensure that your financial records accurately depict the expenses incurred, providing a clearer picture of the company’s financial obligations.

2. Implications for Financial Reporting: It’s important to consider how these changes will influence your overall financial reporting. Altering