Deceased employee W2 amendment created negative payroll liability – Help?

Navigating Posthumous Payroll Complications: A Guide to Amending W-2 Issues

Dealing with payroll matters can be challenging under normal circumstances, but when the situation involves a deceased employee, the complexities multiply. Recently, a situation arose wherein a company faced complications following the death of an employee at the end of December 2023. The incident raises important questions about how to handle payroll and tax issues associated with deceased employees, especially when their tax documents were issued incorrectly.

Background of the Situation

In this specific case, the employee in question passed away just before the new year. Although the individual was deceased, a paycheck was processed shortly after, which included deductions for a 401k loan and other requisite withholdings. Following this, the payroll service generated a W-2 for the employee at the end of January 2024—a move that’s generally deemed inappropriate for someone who has passed away.

The complexities compounded as the estate began preparing 2023 tax filings. This necessitated a request for the payroll service to amend the W-2 while also issuing a 1099 form. Unfortunately, this amendment process led to a journal entry (JE) from the payroll service, which resulted in negative liabilities in the company’s loan and withholding accounts.

The Current Challenge

The primary issue at hand is that too much time elapsed between the employee’s death and the tax filing. The estate had already relocated funds from the deceased’s 401k accounts, which included the amounts related to the loan payment and regular withholdings. This has left the company grappling with how to rectify the negative liability created by the W-2 amendment.

Finding a Solution

To address these issues, one potential solution might involve creating a journal entry to transfer the amounts from payroll liabilities to payroll expenses. However, it’s crucial to consider the broader implications this adjustment would have on the company’s balance sheet.

Doing this could effectively eliminate the negative liability, but it’s important to be wary of the financial reporting ramifications. Such entries could alter the figures in both the assets and liabilities sections of the balance sheet, possibly affecting key financial ratios and reporting accuracy.

Steps Forward

1. Consult a Professional: Given the complexities of payroll and tax regulations, it may be wise to consult with a certified public accountant (CPA) or a payroll specialist who is acquainted with handling matters involving deceased employees.

2. Documentation: Ensure all changes are meticulously documented. This is essential for transparency,