Deceased employee W2 amendment created negative payroll liability – Help?

Navigating Payroll Challenges After the Passing of an Employee: A Call for Guidance

The recent passing of one of our company owners at the end of December 2023 has led to some unforeseen complications regarding payroll obligations. As the unfortunate situation unfolded, paycheck distributions for that pay period occurred in 2024, resulting in a paycheck that included normal deductions and a withdrawal for a 401(k) loan. As expected, a W-2 was issued for the deceased employee at the end of January 2024, a step that appears to be disallowed according to regulatory guidelines for deceased individuals.

Notably, I was not part of the team at the time this took place. Consequently, once the estate began preparing the deceased’s taxes for 2023, I had to contact our payroll service provider to request an amendment to the W-2, aiming to issue a 1099 instead.

However, this amendment has triggered a journal entry from the payroll service provider, which left us with a negative balance in both the loan and withholding liability accounts. From what I understand, in ideal circumstances, the company would have promptly refunded these amounts back to the estate. Unfortunately, due to the significant time lapse between the date of death and the tax filing, the estate has since transferred the funds from the employee’s 401(k) to another account, along with the corresponding loan payment and regular withholding amounts.

Now, I am seeking advice on how to rectify this situation. Is the solution as straightforward as creating a journal entry to reclassify these amounts from payroll liabilities to payroll expenses? If so, what implications would this adjustment have on our balance sheet beyond just clearing the negative liabilities?

Your insights and expertise would be greatly appreciated as we work through this complex issue. Thank you!