Deceased employee W2 amendment created negative payroll liability – Help?

Title: Navigating Payroll Liabilities After the Passing of an Employee: Finding Solutions

The landscape of payroll management can become particularly complex when faced with the unfortunate event of an employee’s passing. Recently, a situation arose involving a deceased employee whose payroll processing resulted in unexpected financial discrepancies. Here’s a closer look at the challenges and possible solutions.

At the end of December 2023, a valued member of our company passed away. However, their last paycheck was issued in January 2024, which included deductions for a 401(k) loan and standard withholdings. Complicating matters further, a W-2 was generated for this employee at the end of January—a practice generally considered improper for deceased individuals.

As the new hire tasked with resolving this matter, I discovered that, for tax purposes, it was necessary to amend the W-2 and replace it with a 1099 due to the nature of the situation. However, this amendment initiated a journal entry (JE) from our payroll service that left us with negative balances in both the loan and withholding liability accounts.

Ideally, the business would initiate refunds of these amounts to the deceased employee’s estate in a more timely manner. However, due to the time lapse between the employee’s passing and the tax filing process, the estate had proceeded to transfer funds from the employee’s 401(k) to a different account, which resulted in the loan payment and regular withholdings being moved as well.

Now, the pressing question is: how do we rectify this situation?

Is it as straightforward as executing a journal entry to adjust those amounts from payroll liabilities to payroll expenses? If that is indeed the solution, what implications might this adjustment have on our balance sheet, beyond simply eliminating the negative liability?

This case emphasizes the importance of understanding payroll regulations and the management of related financial obligations, especially during sensitive times. It’s essential to approach the situation pragmatically, ensuring compliance while striving for an accurate financial representation.

To those navigating similar concerns, consider seeking advice from a qualified accountant or payroll expert to devise the best course of action tailored to your specific circumstances. The journey may be intricate, but with the right support, it’s entirely manageable.