Navigating Payroll Challenges After the Loss of an Employee: An In-Depth Look at W-2 Amendments and Liabilities

The sudden loss of an employee can have far-reaching implications for a business, particularly when it comes to financial matters and payroll processing. A troubling scenario recently unfolded at one company following the unfortunate passing of a key employee at the end of December 2023.

As the new year began, the deceased employee was still issued a paycheck during the payroll period that fell in January 2024. This paycheck included deductions for a 401(k) loan and regular withholdings. Additionally, a W-2 form was generated and distributed at the end of January 2024, which has been flagged as improper since wages cannot be reported for a deceased employee.

Since I wasn’t part of the organization at the time of these events, I had to step in when the estate was preparing to file the late employee’s taxes. This necessitated requesting a W-2 amendment from our payroll service, which led to the issuance of a 1099 form instead.

However, amending the W-2 triggered a journal entry (JE) from the payroll service that created a negative balance in both the loan and withholding liability accounts on our financial statements. Given the elapsed time between the employee’s passing and the filing of taxes, the funds from the employee’s 401(k) had already been transitioned into a different account. This includes the loan payment and additional withholdings—which complicates matters even further.

In addressing this situation, a few questions arise: How can we rectify these negative liabilities created by the W-2 amendment? Is transferring these amounts from payroll liabilities to payroll expenses a viable solution? If so, what are the implications on our balance sheet, besides eliminating the negative liability?

Steps to Resolution

1. Understanding Journal Entries: First, it’s crucial to comprehend the effects of the journal entries made by the payroll service. The aim here is to ensure that the company’s ledgers accurately reflect the financial status without creating discrepancies.

2. Making Adjustments: If transitioning those negative amounts from payroll liabilities to payroll expenses is the path you choose, it’s essential to document this process meticulously. This ensures clarity in what each account represents and helps maintain an accurate financial record.

3. Long-Term Implications: While clearing the negative liability will help simplify your accounts, you should also consider how this adjustment will affect your overall financial reporting. Bear