Deceased employee W2 amendment created negative payroll liability – Help?

Title: Navigating Payroll Challenges Following the Death of an Employee

In managing payroll and compliance, companies can occasionally encounter complex situations—particularly when faced with the unfortunate passing of an employee. A recent incident involving a deceased employee has raised questions concerning the appropriate handling of their payroll liabilities and W-2 documents. Here’s a breakdown of the situation and potential solutions.

Recently, a company faced with a tragic loss at the end of December 2023 found itself in a complicated payroll dilemma. The employee, whose passing occurred just before the new year, was issued a paycheck in early January 2024 for the previous pay period. This paycheck included regular deductions and a 401(k) loan payment, triggering some confusion regarding tax documentation.

Upon reviewing the situation, it was determined that the payroll service company issued a W-2 for this employee at the end of January 2024, a move that is typically not permissible for deceased individuals. Unfortunately, the individual handling the tax filings, who was not affiliated with the company at that time, realized that amendments to their W-2 were necessary. Subsequently, this led to the issuance of a 1099 form to rectify the situation with the estate.

However, this corrective action resulted in a journal entry (JE) from the payroll service, which inadvertently created a negative liability in both the loan and withholding accounts. Compounding the issue, time constraints meant that the estate had already transferred funds from the deceased’s 401(k) accounts, which also included the loan payment and regular withholdings.

The key question now is how to resolve this negative payroll liability effectively. One potential approach is to create a journal entry to shift these amounts from the payroll liability accounts to the payroll expense accounts. But, what implications would this adjustment have on the company’s balance sheet?

By reclassifying the amounts in this manner, the negative liability would be cleared, allowing for cleaner financial statements moving forward. However, it’s crucial to consider that this modification will affect expenses, ultimately impacting profit and loss for the period.

In summary, while the situation presents challenges, taking prompt and decisive action can help clarify the company’s financial standing. Consulting with a qualified accountant or payroll professional can further reinforce that all steps adhere to regulatory requirements, ensuring that the organization navigates these murky waters with confidence.