Deceased employee W2 amendment created negative payroll liability – Help?

Navigating Payroll Challenges After the Loss of an Employee: A Case Study

The unfortunate passing of an employee can introduce complex payroll challenges for any business. In a recent scenario, a company faced significant issues following the death of one of its owners at the close of December 2023. The payday for that specific pay period occurred in early 2024, during which a paycheck was issued, deducting a 401k loan payment alongside standard deductions. However, by the end of January 2024, a W2 was also generated for this deceased employee, a move that raised some eyebrows regarding its legality.

For those of us not involved in the payroll process at that time, understanding the implications can be cumbersome. In this case, as preparations were made for the deceased’s 2023 tax filings by the estate, a request was made to the payroll service provider to amend the W2 and substitute it with a 1099 form. This adjustment, however, instigated a journal entry from the payroll service, leading to an unwanted negative liability showing up in the loan and withholding accounts.

The complications escalate from there. Generally, one would expect that in a timely manner, the business would issue a refund to the estate for the amounts deducted. However, due to delays between the death and the tax filing, the estate had already transferred funds from the employee’s 401k accounts, thereby complicating the repayment of the loan and the regular withholding deductions.

This leaves us with the pressing question: How do we rectify this situation? Is the solution as straightforward as adjusting a journal entry to shift the negative amounts from payroll liabilities to payroll expenses? And what impact would that have on the company’s balance sheet, aside from clearing the negative liability?

To properly address this issue, it’s crucial to conduct a thorough review of the payroll records and consult with your Accounting team or a tax professional. A well-crafted journal entry could indeed resolve the negative liabilities, transferring those amounts appropriately. However, it’s essential to consider the overall implications on the financial statements as this may affect expense recognition and financial reporting for the period.

In conclusion, while the loss of an employee is a sensitive and challenging situation, understanding the necessary steps and how to navigate payroll responsibilities is vital. Ensure you consult with professionals who can guide you through correcting the records while addressing any legal obligations to the estate.