Navigating Payroll Complications: How to Address a Deceased Employee’s W-2 Amendment

The unexpected loss of an employee can complicate payroll management, especially when it comes to tax reporting and employee benefits. A recent scenario highlights the challenges faced by businesses when a key member of the team passes away just before a pay period.

The Situation

In late December 2023, one of the company owners passed away, yet the payday for that period fell in January 2024. This unfortunate timing resulted in a paycheck being issued posthumously, which included regular withholding deductions and a 401(k) loan payment. To complicate matters further, a W-2 was generated at the end of January 2024—a move that is generally prohibited for deceased individuals.

The Complications

As the new staff member handling payroll matters after the owner’s passing, I had to navigate uncharted waters. When the estate began preparing the 2023 tax filings, it became apparent that the original W-2 needed an amendment, transitioning the reported income to a 1099 form instead.

However, this amendment from our payroll service resulted in a journal entry (JE) that inadvertently created a negative liability in both the loan and withholding accounts. Ordinarily, in such cases, the business would issue a refund to the estate to balance these accounts. Unfortunately, due to delays in addressing these issues, the estate had already transferred the funds from the deceased’s 401(k) plan into a different account, which also affected the loan repayment and regular reductions.

Seeking Solutions

Now, the critical question is: how can this situation be rectified?

One possible solution involves creating a journal entry to reallocate those amounts from the payroll liabilities into payroll expenses. This action would essentially clear the negative balance in the liability accounts. However, it’s essential to consider the broader implications of this adjustment on the company’s balance sheet.

Points to Consider

1. Impact on Financial Statements: Adjusting these figures will reflect the changes in your financial statements, shifting liabilities into expenses. It’s crucial to ascertain how this alteration will affect your overall account balances and whether it aligns with financial reporting standards.

2. Consulting with Professionals: Given the complexities involved in payroll and tax amendments, consulting a CPA or tax professional is highly advisable. Their expertise will ensure compliance and help mitigate any potential errors that could arise from incorrect Accounting practices.

3. Documentation and Communication: Maintaining clear documentation