Navigating W-2 Amendments for Deceased Employees: A Case Study

In the world of payroll and human resources, certain situations can arise that require careful navigation, particularly when it involves the unfortunate passing of an employee. A recent incident at our company sheds light on the complexities of handling payroll liabilities related to a deceased employee’s W-2 amendment. This post outlines the scenario, the challenges faced, and seeks advice on resolving emerging issues.

The Background

At the end of December 2023, one of our company’s owners passed away. Although the employee’s passing occurred at the very end of the year, the payday for that pay period took place in early 2024. Despite the tragedy, a paycheck was issued, which included deductions for a 401(k) loan and standard withholdings. By the end of January 2024, a W-2 was generated for the deceased employee, a move I later learned was not permitted.

As I was not part of the organization at the time, I was tasked with addressing the payroll discrepancies when the estate began filing the decedent’s taxes. To comply with tax obligations, I reached out to our payroll service provider to amend the W-2 and facilitate the issuance of a 1099 instead.

The Complication

Despite my efforts to amend the W-2, a journal entry (JE) was created by the payroll service, resulting in a negative liability posted to our loan and withholding accounts. Typically, under more favorable circumstances, the business would issue refunds to the estate for the erroneously withheld amounts. However, significant delays in addressing this matter led the estate to transfer funds from the deceased’s 401(k) accounts to other accounts, complicating the situation further.

Seeking Solutions

Now I find myself in need of guidance regarding how to rectify the negative liability balance. My initial thought is to create a journal entry that reallocates these amounts from the payroll liabilities to payroll expenses. However, I am curious about the broader implications of this adjustment.

1. Does the proposed JE effectively resolve the negative liability issue, and what impact will it have on the balance sheet?

2. Are there any additional steps or considerations I should be mindful of to ensure compliance and accuracy in our financial records?

Conclusion

Handling payroll matters for a deceased employee is undoubtedly challenging, especially when unforeseen complications arise. As we strive to ensure accurate financial reporting and compliance, I would appreciate insights from those experienced in similar