Deceased employee W2 amendment created negative payroll liability – Help?

Navigating Payroll Liabilities After the Loss of an Employee: A Comprehensive Guide

Losing an employee is always a challenging situation, both emotionally and operationally, particularly when it comes to managing payroll and tax implications. Recently, one company faced a complex scenario involving the passing of an employee just as the year was coming to a close, raising questions about payroll liabilities and how to amend them posthumously.

The Situation

In this specific case, the company owner passed away at the end of December 2023. Their last paycheck was processed in early 2024, which included deductions for a 401k loan and other regular withholdings. However, this created complications when the payroll service issued a W2 for the deceased employee—a move that is generally not permissible.

Despite not being present during the initial handling of this case, the current team had to initiate an amendment of the W2 and instead request a 1099 to ensure accurate reporting for the estate’s taxes. The necessary amendments triggered a journal entry (JE) from the payroll service, resulting in a negative payroll liability in both the loan and withholding accounts.

The Challenges

Typically, when such amendments are made in a timely manner, the business would reimburse these amounts to the estate. However, in this instance, delays occurred, and by the time the tax filings were approached, the funds from the employee’s 401k accounts had already been moved, complicating the matter further.

This situation now begs the question: how can one resolve these negative payroll liabilities effectively?

Finding a Solution

To address these outstanding payroll liabilities, one potential approach is to create a journal entry that reallocates these amounts from payroll liabilities to payroll expenses. This could help clear the negative balance on the liability account.

However, it’s essential to consider the broader implications on the balance sheet. While this action would eliminate the negative liability, it would also increase payroll expenses, impacting overall financial reporting.

Key Takeaways

1. Consult Professionals: Due to the complexities involved, it’s advisable to seek guidance from a CPA or a payroll expert who can provide tailored advice for navigating these sorts of issues.

2. Thorough Documentation: Keep detailed records of all communications and transactions related to the deceased employee’s pay and benefits to ensure transparency and compliance.

3. File Timely Amendments: Prompt actions in similar cases can save time and resources, minimizing complications like negative liabilities.

4. Future Precautions