Deceased employee W2 amendment created negative payroll liability – Help?

Title: Navigating Payroll Challenges Following the Loss of an Employee

The unexpected passing of an employee can create a myriad of complexities, especially when it comes to payroll and tax filings. Recently, one small business faced a significant challenge after the death of one of its owners at the end of December 2023. With the final paycheck being issued in 2024—complete with 401k loan deductions and other regular withholdings—a series of compliance issues emerged, particularly regarding the issuance of the W2 for a deceased individual.

The Situation

The issue arose when the late owner was issued a paycheck for the last pay period of 2023, which, unfortunately, occurred after his passing. Moreover, the payroll service later issued a W2 for 2023, which is typically not permissible for a deceased employee. Because I was not part of the company during this time, I had to step in when it became necessary to file the deceased’s taxes via the estate. This meant requesting an amendment of the W2 and the issuance of a 1099 instead.

Consequences of the W2 Amendment

Upon making the W2 amendment, the payroll service generated a journal entry that resulted in a negative liability in both the loan account and the withholding liability accounts. Ideally, once a situation like this is rectified in a timely manner, the company would refund any erroneous amounts to the estate. However, due to the delay between the employee’s death and the completion of tax filings, the funds from the employee’s 401k had already been transferred to a different account, complicating matters further.

Seeking Solutions

This situation raises a crucial question: How should I address the resulting negative liabilities? Is it as straightforward as creating a journal entry to shift these amounts from the payroll liability accounts to payroll expenses? If this is indeed the case, what implications will this adjustment have for our balance sheet, aside from clearing the negative liabilities?

Conclusion

Resolving payroll issues stemming from the death of an employee can be challenging, but it’s essential to address these concerns promptly to maintain accurate financial records. If you find yourself in a similar situation, consulting with a financial professional or accountant may prove beneficial in ensuring compliance and proper Accounting practices. By effectively managing these liabilities, you can protect your business interests and uphold your fiduciary responsibilities to both the estate and the remaining employees.