Deceased employee W2 amendment created negative payroll liability – Help?

Navigating Payroll Challenges After the Loss of an Employee

Dealing with payroll intricacies can become particularly daunting during sensitive times, especially following the passing of an employee. Recently, a situation arose in which the amendment of a deceased employee’s W-2 resulted in complications for the company’s payroll liability. Here’s a breakdown of the situation and an inquiry regarding resolution.

At the conclusion of December 2023, one of the company’s owners sadly passed away. His final payday, occurring in 2024, led to the issuance of a paycheck that included deductions for a 401(k) loan payment and standard payroll deductions. However, a significant issue emerged with the issuance of a W-2 form at the end of January 2024 for the deceased individual, which, as it turns out, is typically not permissible. Because I was not part of the team at that time, handling the tax filing for the individual’s estate necessitated reaching out to the payroll service provider to amend the W-2 and instead issue a 1099 form.

Upon adjusting the W-2, the payroll service generated a journal entry that unfortunately resulted in a negative balance within both the loan and withholding liability accounts. It appears that typically, in an appropriate timeframe, the amounts would be reimbursed to the estate; however, due to delays from the time of death to tax filing, the estate had already relocated funds from the employee’s 401(k) accounts into a different account, which included the loan payments and normal deductions.

Now, the pressing question arises: how can these discrepancies be resolved effectively?

Is it as straightforward as creating a journal entry to transfer the amounts from payroll liabilities to payroll expenses? If so, what implications would this have on the overall balance sheet besides eliminating the negative liability?

This complex scenario highlights the critical need for meticulous attention to payroll management, especially in the context of employee departures. If you find yourself caught in a similar situation, consider consulting with a financial professional or accountant to ensure compliance and proper handling of payroll duties during such transitions.