Deceased employee W2 amendment created negative payroll liability – Help?

Navigating Payroll Complications Following an Employee’s Passing

When an employee passes away, it introduces a set of complexities that can challenge even the most seasoned payroll professionals. This situation recently unfolded in a company where one of the owners tragically died at the end of December 2023. Here, I’ll share insights into the issues that arose regarding W2 amendments and how to resolve negative payroll liabilities created in the process.

The Circumstances

The company faced an unusual payroll scenario when payday for the final work period fell in January 2024, after the owner’s unfortunate passing. A paycheck was processed, which included standard deductions as well as a 401k loan payment. However, the owner was subsequently issued a W2 at the end of January 2024—an occurrence generally deemed inappropriate for a deceased individual.

Due to the timing and the fact that I was not part of the team at that time, I had to reach out to our payroll service provider to amend the W2 and issue a 1099. Unfortunately, this amendment resulted in a journal entry from the payroll service that left us with negative liabilities in both the loan and withholding accounts.

Understanding the Complications

Usually, when payroll errors like this occur, the business has the opportunity to refund the amounts back to the deceased’s estate in a timely manner. However, following this particular case, significant delays between the time of death and tax filing meant the estate had already transferred funds from the employee’s 401k into another account, hence impacting the loan payments and withholding amounts associated with that account.

This situation raises a pressing question: how can we rectify these negative liabilities without aggravating the financial inconsistencies?

Steps Toward Resolution

To resolve this issue, I am considering whether a straightforward journal entry (JE) could be utilized to adjust these amounts from payroll liabilities to payroll expenses. However, it is crucial to consider the ramifications of this action on our balance sheet.

• Clearing Negative Liabilities: Moving those amounts would effectively eliminate the negative balances currently portrayed in our payroll liability accounts, restoring accurate Accounting records.

• Impact on Financial Statements: Transitioning these amounts to payroll expenses will alter the expense reports but should give a clearer representation of our financial standing without misrepresenting payroll liabilities.

Conclusion

While the passing of an employee is a deeply sensitive issue, especially when intertwined with payroll complexities, prompt action and clear communication with your payroll service can help navigate these challenges. The