Deceased employee W2 amendment created negative payroll liability – Help?

Navigating Payroll Challenges After an Employee’s Passing: A Case Study

In the often-complex world of payroll, maintaining accuracy and compliance can become particularly challenging in cases involving the untimely passing of an employee. Such situations demand careful consideration, as illustrated by a recent issue concerning a deceased employee’s W-2 amendment that inadvertently resulted in a negative payroll liability.

The Background of the Case

In late December 2023, one of the company owners passed away, triggering a series of payroll complications. Although his death occurred within the calendar year, his final paycheck was processed during the payroll period in January 2024. This paycheck included deductions for a 401(k) loan and other regular withholdings, as well as the issuance of a W-2—the latter being a significant mishap, as issuing a W-2 for a deceased employee is generally not permitted.

Upon discovering this oversight, particularly as the estate began filing the deceased’s 2023 taxes, it was necessary to collaborate with the payroll service provider to amend the W-2. This amendment subsequently generated a journal entry (JE) that resulted in a negative liability within the accounts related to both the loan and the withholding amounts.

The Current Dilemma

Due to the time elapsed between the owner’s death and the tax filing process, the estate had previously transferred funds from the employee’s 401(k) to another account. As a result, the intended loan repayment and withholding amounts are now missing.

Faced with this scenario, the primary question is how to resolve the negative liability that has manifested in the Accounting records. Is the solution as straightforward as creating a journal entry to transfer these amounts from payroll liabilities to payroll expenses?

Considerations for Resolution

If the decision is made to adjust the accounts, it is crucial to understand the implications:

1. Clearing Negative Liabilities: By executing a journal entry to move amounts from payroll liabilities to payroll expenses, the immediate goal of eliminating the negative liability is achieved.

2. Impact on Financial Statements: This adjustment will affect the balance sheet by reducing liabilities, thereby improving the net position of the company. Additionally, it will result in an increase in expenses, which could impact profitability for the reporting period.

3. Consulting with Professionals: Given the complexity associated with payroll and tax regulations, it is advisable to collaborate with a qualified accountant or tax professional to ensure compliance and proper handling of these financial nuances.

Conclusion

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