Deceased employee W2 amendment created negative payroll liability – Help?

Addressing Payroll Challenges After the Loss of an Employee: A Guide for Business Owners

Navigating payroll processes can be complex, especially when dealing with the untimely death of an employee. One company owner faced challenges following the death of an employee in late December 2023, which has led to potential payroll complications for the organization.

Context of the Issue

After the employee’s passing, payday for the last pay period occurred in January 2024. In a situation that raised concerns, a paycheck was issued to the deceased employee, including withholdings for a 401(k) loan and standard deductions. Subsequently, a W-2 was generated for tax reporting purposes at the end of January. However, it was revealed that W-2 issuances for deceased individuals are not permitted, raising significant questions about compliance and the accuracy of payroll records.

The challenge further compounded when the estate began filing the deceased’s 2023 taxes. The payroll process required the service provider to amend the original W-2 and issue a 1099 form instead. This amendment created a journal entry from the payroll provider, resulting in negative amounts reflected in both the loan and withholding liability accounts.

Understanding the Financial Implications

Given the time elapsed between the employee’s death and the tax filing, the estate had already transferred assets from the employee’s 401(k), which included both the loan payment and the standard deductions. As a result, the business now faces a situation where the typical process of refunding these amounts to the estate is not feasible.

Steps to Rectify the Situation

To address this issue effectively, you can consider the following steps:

1. Journal Entry Adjustments: Evaluate the possibility of creating a journal entry to transfer the balances from the payroll liabilities accounts to the payroll expenses. This adjustment can help address the negative liability issue directly.

2. Impact on Financial Statements: While it may seem straightforward to clear out the negative liability, consider the broader implications this adjustment may have on your balance sheet. Essentially, this will change how your payroll liabilities and expenses are reported, impacting your overall financial picture.

3. Consulting a Professional: Given the complexities associated with payroll amendments, it may be beneficial to consult a financial professional or accountant who specializes in payroll matters. They can provide guidance tailored to your specific circumstances and help ensure compliance with regulations.

4. Implementing Better Protocols: Lastly, to avoid similar situations in the future, consider establishing clear protocols