Deceased employee W2 amendment created negative payroll liability – Help?

Title: Navigating Payroll Challenges After the Loss of an Employee

In an unfortunate turn of events, one of the owners of a company passed away at the end of December 2023, leading to a series of payroll complications that have raised significant concerns among the Accounting team. The complexities arose when the pay period in which the employee passed away extended into 2024, resulting in the issuance of a paycheck that included deductions for a 401(k) loan and other withholdings.

Despite the employee’s passing, a W-2 was generated at the end of January 2024, a situation that has raised eyebrows, as typically, an individual who has passed cannot be issued such tax documents. Since I was not part of the team when this situation unfolded, it fell upon me to request an amendment to the W-2 from our payroll service provider. My goal was to correct this oversight by issuing a 1099 to appropriately reflect the employee’s status.

However, the W-2 amendment brought about a journal entry from our payroll service that resulted in a negative imbalance in our loan and withholding liability accounts. An additional layer of complexity emerged due to the considerable delay between the employee’s death and the filing of taxes by the estate. The estate has since transferred the funds from the employee’s 401(k) accounts, consequently affecting both the loan payments and the regular withholdings.

Now, I find myself seeking guidance on how to rectify this issue. One possible solution I’ve considered is creating a journal entry to transfer these amounts from the payroll liabilities to payroll expenses. However, I am curious about the broader implications this adjustment might have on our balance sheet, aside from resolving the negative liability.

If anyone has experience with similar situations or can provide insights into best practices for managing payroll liabilities associated with deceased employees, your expertise would be greatly appreciated. How can we navigate this challenging scenario while ensuring compliance and maintaining accurate financial records?