Deceased employee W2 amendment created negative payroll liability – Help?

Navigating Payroll Challenges After a Deceased Employee: Seeking Solutions for W2 Amendments

The loss of a team member is a difficult time for any organization, but it can become even more complex when it comes to addressing payroll and tax liabilities. A recent situation involving a deceased employee has raised questions about how to appropriately handle W2 amendments and the resulting financial implications.

In a circumstance that unfolded at the end of December 2023, the company experienced the unfortunate passing of one of its owners. Although the employee was deceased, payday for that period fell within 2024, leading to the issuance of a paycheck. This paycheck included regular deductions as well as a loan payment related to his 401(k). By January 2024, a W2 was generated for this individual, which, according to tax regulations, should not have been issued posthumously.

As the individual responsible for managing payroll became involved only after the unfortunate event, it became necessary to engage with the payroll service provider to amend the W2 due to the ongoing tax filing for the deceased’s estate. This amendment subsequently triggered a journal entry (JE) from the payroll company, resulting in negative balances in both loan and withholding liability accounts.

Typically, under more favorable circumstances, a business would reimburse the estate for these payroll liabilities. However, delays between the employee’s death and the estate’s tax filing resulted in funds being transferred from the individual’s 401(k) to another account, complicating matters further.

This raises pertinent questions about remediation. How can one resolve the negative payroll liabilities? Is the solution as straightforward as shifted amounts from payroll liabilities to payroll expenses? And importantly, what are the implications for the balance sheet beyond eliminating negative liabilities?

Addressing these questions is critical for ensuring not only compliance with tax regulations but also for maintaining the integrity of the company’s financial records. Let’s explore the best steps forward to rectify these payroll discrepancies and prevent future occurrences.

Steps to Consider

1. Consult with a Tax Professional: Engaging a CPA or tax advisor knowledgeable in payroll systems and tax regulations concerning deceased employees can provide valuable insight into the proper corrective measures.

2. Adjust Journal Entries: If transitioning amounts from payroll liabilities to payroll expenses is advisable, ensure that these entries are accurately documented to maintain clarity in financial reporting. This adjustment will likely clear the negative liability but will adjust your overall expenses.

3. Review Financial Impact: You’ll want to assess how these changes affect your balance sheet. While