Deceased employee W2 amendment created negative payroll liability – Help?

Navigating Payroll Complications After the Passing of an Employee: A Guide for Employers

The unfortunate reality of managing payroll can sometimes become even more complex following the passing of an employee. Recently, a scenario faced by a business owner highlights these challenges, particularly regarding W2 amendments and resulting payroll liabilities.

In late December 2023, a valued employee passed away. However, payday for that payroll period fell in 2024, leading to the issuance of a paycheck that included withholdings for a 401k loan payment and standard deductions. By January 2024, a W2 was generated for the deceased, which many payroll professionals know is not permissible.

For the individual stepping into the payroll management role post-incident, this situation became a critical learning moment. As the deceased’s 2023 taxes related to payroll were being prepared by the estate, it became necessary to request an amendment to the W2 and subsequently issue a 1099 to address the tax implications accurately.

However, this amendment resulted in a journal entry from the payroll service provider that created a negative liability within both the loan and withholding liability accounts. Understanding the financial implications of this move is vital for ensuring that the company’s books remain accurate.

Typically, in such scenarios, the company would issue a refund from the account to the deceased’s estate in a timely manner. Unfortunately, due to the elapsed time between the employee’s passing and the tax filing process, the funds from the employee’s 401k had already been relocated, complicating the payroll deductions that were supposed to be addressed.

How Can Employers Address Negative Payroll Liabilities?

If you’re in a similar position and facing a negative liability on payroll accounts, you may wonder about the best path forward. One potential resolution could involve making a journal entry to transfer the problematic amounts from payroll liabilities to payroll expenses. However, it’s important to consider the broader implications of this action, particularly on your balance sheet.

1. Impact on the Balance Sheet: By moving amounts from payroll liabilities to payroll expenses, you may effectively clear the negative liability, allowing for a more accurate reflection of your financial standing. However, bear in mind that this adjustment also increases your expense accounts, which could affect profit measures for the period.

2. Consult with Professionals: Before proceeding with any adjustments, it’s wise to consult with a financial advisor or an accountant familiar with payroll and tax regulations. They can provide specific guidance based on your unique circumstances and ensure compliance with relevant regulations.

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