Deceased employee W2 amendment created negative payroll liability – Help?

Navigating Payroll Complications After the Loss of an Employee: A Guide

The untimely passing of an employee can lead to various complexities in payroll management, especially when it comes to tax filings and accounts associated with the individual. Recently, I encountered a situation that raised several questions regarding best practices in handling payroll matters after an employee’s death.

The Situation

Late December 2023 marked the passing of one of our company owners. Unfortunately, the timing coincided with a payroll period that fell in January 2024 when a paycheck was issued, which included withholdings for both 401k loan payments and regular deductions. Subsequently, a W2 was generated at the end of January 2024, an action that is generally not permissible for deceased individuals.

Since I was not part of the team when these events occurred, the estate of the deceased employee required filing his 2023 taxes. I liaised with our payroll service provider to ensure that an amendment to his W2 was processed, replacing it with a 1099 form as is standard procedure for deceased employees.

However, complications arose when the W2 amendment resulted in a journal entry from our payroll service. This entry created a negative liability in our loan and withholding liability accounts.

Understanding the Implications

Given the elapsed time between the employee’s passing and the tax filing, the estate had already transferred the funds from the employee’s 401k accounts, including the loan payments and withholdings. This raises the question: how can we rectify the negative liability now recorded in the accounts?

It’s understood that, under typical circumstances, the firm would refund any amounts owing to the estate promptly after such matters for the deceased employee are aligned. However, because of the time that has elapsed, addressing this situation requires careful consideration.

Proposed Solution

One potential remedy would be to create a journal entry that reallocates those amounts from payroll liabilities to payroll expenses. However, it’s essential to consider the broader implications this change may have on our financial statements.

1. Balance Sheet Impact: Adjusting these amounts would indeed clear the negative liabilities, but you must ensure that this does not adversely affect your overall financial position. Such entries could potentially distort expense tracking if not documented correctly.

2. Consultation Recommended: Before proceeding, it’s advisable to consult with a finance professional who can provide guidance specific to similar cases, ensuring compliance with regulations while accurately reflecting all necessary adjustments.

Conclusion

Managing payroll after the passing of an employee can