Deceased employee W2 amendment created negative payroll liability – Help?

Navigating Payroll Complications After a Deceased Employee: Insights and Solutions

The unfortunate passing of an employee can create complex challenges for organizations, particularly in relation to payroll and tax obligations. A case recently highlighted underscores the intricacies involved when managing payroll for a deceased worker.

In December 2023, the company experienced the loss of one of its owners. Unbeknownst to the organization at the time, the payday for the final pay period occurred in early January 2024. As a result, this deceased employee was issued a paycheck, complete with deductions for a 401(k) loan and standard withholdings. Complicating matters further, the employee’s W-2 was generated at the end of January 2024, despite it being generally understood that such an action is inappropriate following a person’s death.

As someone who was not involved during this period, I found myself needing to coordinate with the payroll service to rectify this situation while the estate was preparing to file the 2023 taxes. My request for an amendment of the W-2 led to the issuance of a 1099 form in lieu of the original W-2.

However, this amendment has since resulted in a journal entry (JE) from the payroll service, causing a negative liability to appear within the loan and withholding accounts. Traditionally, the company would refund these amounts back to the estate within a reasonable time frame, but due to the lapse in time between the employee’s passing and the tax filing, funds from the deceased’s 401(k) were already transferred elsewhere. Consequently, this complicates the refunding process for the loan payments and regular withholdings.

The pressing question is: How can this situation be effectively resolved?

One potential solution could be to create a journal entry that transfers the amounts currently reflected in the payroll liabilities to payroll expenses. If this approach is viable, it is important to understand the broader implications. The primary effect would involve eliminating the negative liability from the balance sheet. However, it is essential to recognize how this adjustment might impact financial statements and overall payroll expense reporting.

In conclusion, this case serves to illustrate the importance of careful payroll management and the potential repercussions of oversights following the death of an employee. If you’re ever faced with a similar situation, consulting with a financial expert can provide clarity and ensure compliance with relevant tax laws and regulations.