Deceased employee W2 amendment created negative payroll liability – Help?

Navigating Payroll Complications After a Deceased Employee: A Guide for Employers

The unfortunate passing of an employee can trigger a series of unexpected challenges for businesses. One such issue recently emerged following the passing of a business owner in December 2023. The subsequent payroll and tax reporting processes presented a unique set of difficulties that not only impacted the business but also created a complicated situation involving payroll liabilities.

Shortly after the owner’s passing, payroll for the final pay period occurred in 2024, leading to the issuance of a paycheck that included deductions for a 401(k) loan and standard withholdings. Subsequently, a W-2 was generated in January 2024. However, it is generally understood that such forms should not be processed for deceased employees.

Since the individual in question was not present when these events unfolded, the task of rectifying the situation grew urgent when the estate began filing taxes. To address the issue, it was necessary to request that the payroll service amend the W-2 and issue a 1099 form instead. This amendment ultimately resulted in a journal entry from the payroll service that left negative balances in the loan and withholding liability accounts.

Under normal circumstances, it is common practice for the company to refund any outstanding amounts to the estate in a timely manner. However, complications arose because the estate had already transferred funds from the deceased’s 401(k) accounts before the necessary amendments were made. Consequently, both the loan payment and regular withholding had also been relocated.

Given these complexities, how does one address the negative liabilities reported?

A potential solution may involve creating a new journal entry to transfer the amounts from payroll liabilities to payroll expenses. But what repercussions could this have on your balance sheet? While this action could effectively eliminate the negative liability, it may also impact your overall payroll expenses, leading to shifts in financial reporting that you will need to monitor.

It’s crucial to consult with a financial advisor or a payroll professional to ensure that any adjustments are made correctly and do not inadvertently affect your company’s financial integrity. Navigating these circumstances may be daunting, but addressing them promptly and effectively is essential for maintaining compliance and clarity in your financial records.

By understanding the implications of payroll amendments following the passing of an employee, businesses can manage their responsibilities appropriately, ensuring that both legal and fiscal considerations are effectively addressed.