Deceased employee W2 amendment created negative payroll liability – Help?

Resolving Payroll Liabilities Linked to a Deceased Employee: A Guide

Navigating the complexities of payroll Accounting can be challenging, especially when it involves sensitive situations such as the passing of an employee. Recently, our company faced an unusual predicament following the unfortunate death of one of our owners in late December 2023.

The Situation Unfolds

As the final payday for that pay period occurred in early 2024, the deceased owner received a paycheck. This included standard deductions along with a payment for a 401(k) loan. However, when I joined the company and the estate was in the process of filing the deceased’s taxes for 2023, I discovered that a W-2 had been incorrectly issued at the end of January 2024—something that should not happen posthumously.

Upon realizing this inconsistency, I contacted our payroll service to amend the W-2 and to issue a 1099 instead, as per the legal requirements. However, the process did not come without complications. The amendment resulted in a journal entry (JE) from the payroll service that created a negative payroll liability in the accounts related to the loan and the withholding amounts.

Understanding the Implications

From my conversations and research, it appears that under normal circumstances, the company would refund these deducted amounts directly to the estate. However, significant time had passed since the employee’s passing, and the estate had already transferred funds from the 401(k) accounts, which included the parts designated for the loan payment and regular withholding.

Seeking Solutions

This situation leaves me with a pressing question: How can this issue be remedied?

One potential solution could be making a journal entry to reallocate these amounts from payroll liabilities to payroll expenses. However, I am concerned about the broader implications on our balance sheet. Clearing the negative liability is certainly a priority, but I need to understand how this adjustment will affect our financial statements moving forward.

Input from Experts

I am reaching out to fellow professionals or anyone experienced in payroll Accounting to seek advice on how to navigate this situation. Is the journal entry the right approach, or are there additional steps we should consider? Understanding the best practices in handling such complex payroll liabilities is crucial for ensuring our company maintains compliance and financial accuracy during this sensitive time.

Your insights would be greatly appreciated as we work through this challenging scenario.