Deceased employee W2 amendment created negative payroll liability – Help?

Navigating Payroll Complications After an Employee’s Passing: A Guide for Employers

When handling payroll, errors or complications can arise, especially under sensitive circumstances like the passing of an employee. Recently, a complex situation unfolded involving a deceased employee and the consequences of an incorrect W2 issuance. Here’s a breakdown of the situation and potential solutions for managing payroll liabilities effectively.

The Scenario

At the close of December 2023, a business owner sadly passed away. Despite this, a paycheck was issued for the remaining pay period in 2024, which included standard deductions as well as payments related to a 401(k) loan. At the end of January 2024, the payroll service generated a W2 for the deceased, an action that is generally prohibited.

When the estate of the deceased began filing taxes, it became necessary to amend the W2 and transition to issuing a 1099. However, this amendment led to a journal entry from the payroll service, resulting in a negative balance in the loan and withholding liability accounts.

The Complication

In a timely scenario, the business would typically reimburse the estate for the deducted amounts. Unfortunately, due to the delay between the employee’s passing and the tax filing, the funds from the employee’s 401(k) had already been moved into a different account. Consequently, the deductions that were initially withheld become problematic and must be addressed.

Solutions to Consider

1. Making Journal Entries: The first step involves making a journal entry to adjust the financial records accurately. This can include transferring the negative liabilities to payroll expenses.

2. Understanding the Financial Impact: It’s important to recognize the effects of this adjustment on your balance sheet. While clearing the negative liability is a priority, such a change may also impact your total expenses, potentially affecting profits and loss statements.

3. Consulting a Professional: Given the complexities involved in payroll and tax regulations, seeking advice from an Accounting professional or tax advisor is highly recommended. This ensures that any amendments you make comply with laws and best practices.

Conclusion

The unfortunate passing of an employee can lead to significant payroll challenges, primarily when it involves complicated taxation issues and liabilities that linger. Timely communication, accurate record-keeping, and professional advice can help mitigate these issues and ensure compliance with regulations. By taking proactive measures and adjusting records appropriately, employers can navigate these challenges with greater ease.