Deceased employee W2 amendment created negative payroll liability – Help?

Title: Navigating Payroll Challenges After the Loss of an Employee: A Guide to W-2 Amendments

When a valued member of a company passes away, handling their final payroll and tax matters can become significantly complex. This is particularly true when discrepancies arise surrounding their W-2 forms and payroll liabilities. Recently, I encountered a situation that highlights these challenges, and I hope to crowdsource some insights on effectively resolving them.

At the end of December 2023, one of our company’s owners sadly passed away. The unfortunate timing meant that payday for that pay period occurred in January 2024, leading to the issuance of a paycheck that included withholdings for a 401(k) loan repayment and other deductions. Later, a W-2 was generated in January 2024, which I discovered is not permissible for deceased individuals.

As I was not part of the company during this event, I found myself responsible for addressing these payroll issues while the estate was preparing the deceased’s 2023 tax filings. I requested the payroll service provider amend the W-2 and issue a 1099 instead, which seemed to be the appropriate path forward. However, the W-2 amendment triggered a journal entry from the payroll service that resulted in a negative balance within the loan and withholding liability accounts.

Typically, in a more timely scenario, the business would process refunds for these deductions back to the estate. However, significant time has passed since the owner’s passing, and the estate has already transferred funds from the employee’s 401(k). Consequently, this has led to complications regarding the recorded loan payment and other deductions.

Now, I find myself seeking guidance on how to rectify this situation. Is the solution as straightforward as creating a journal entry to move these amounts from the payroll liabilities to payroll expenses? If so, what implications would that have on our balance sheet beyond simply eliminating the negative liability?

I appreciate any advice or experiences you might share regarding similar situations. Your insights could be invaluable in navigating this complex payroll landscape.