Deceased employee W2 amendment created negative payroll liability – Help?

Navigating Payroll Complications After an Employee’s Passing: A Guide for Employers

The unfortunate passing of an employee can bring about a series of intricate issues, particularly concerning payroll and tax filings. Recently, a situation arose where a company faced complications due to the loss of an employee in December 2023, leading to unexpected liabilities. If you’re in a similar situation or want to ensure your company is prepared, here’s a breakdown of the challenges and potential solutions.

Background of the Situation

In this case, the owner of a company passed away at the end of December 2023. Despite his passing, a paycheck was issued early in 2024 for a pay period that included the end of December, from which regular deductions, including a 401(k) loan payment, were withheld. The complexities arose when the deceased was given a W-2 at the end of January 2024, which is generally not permissible for someone who has passed away.

As the individual in charge of payroll, the staff member had to seek an amendment from the payroll service to correct the W-2 and issue a 1099 instead, during the estate’s tax filing process. However, this amendment triggered a journal entry (JE) from the payroll service that resulted in a negative balance in both the loan and withholding liability accounts.

Understanding the Complications

Typically, in cases like these, once a payroll amendment is completed, the organization needs to issue a refund to the estate from the subsequent adjustments. Yet, due to the time gap between the employee’s passing and the tax filings, the estate had already moved the funds from the employee’s 401(k) to another account, complicating matters further.

Steps to Resolve the Issues

If you find yourself facing a similar predicament, consider the following steps to address the negative payroll liabilities effectively:

1. Assessment of Current Liabilities: Begin by thoroughly reviewing the negative liabilities within the payroll accounts. Understanding the extent of the issue will help inform your strategy.

2. Making Journal Entries: You may need to create a journal entry that reallocates the negative amounts from the payroll liability accounts to the payroll expense accounts. This action would effectively resolve the discrepancies in your accounts.

3. Impact on Financial Statements: Transfering these figures to payroll expenses will clear the negative liability but will also increase payroll expenses on your balance sheet. As a result, you should ensure that your financial reporting reflects these adjustments accurately.

4. **Consultation