Navigating Payroll Liability Issues After the Loss of an Employee

Losing a key member of your team is challenging, not just on an emotional level but also in terms of navigating the complexities tied to payroll and taxes. If your company has recently faced the unfortunate event of an employee passing away, you may find yourself dealing with unexpected payroll complications—especially if the individual’s financial matters are still being processed.

The Situation

Recently, one of the owners of a business passed away in December 2023. The subsequent payroll for that period wasn’t processed until January 2024, resulting in a paycheck being issued posthumously. This paycheck included standard deductions as well as a repayment for a 401(k) loan. Adding to the complexity, a W-2 was generated for the deceased employee at the end of January 2024, a practice generally considered noncompliant in these circumstances.

As I was not with the company during this period, it fell upon me to ensure that the estate’s 2023 tax filings were accurate. To rectify the inaccuracies, I needed to reach out to the payroll service for an amendment to the W-2 and to issue a 1099 instead.

The Aftermath

This W-2 amendment initiated a journal entry from our payroll service, which unfortunately resulted in a negative liability on both the loan and withholding accounts. Under normal circumstances, the business would typically refund these amounts to the estate. However, due to the time gap between the employee’s passing and tax filing, the estate had already relocated funds from the employee’s 401(k) accounts, essentially complicating the situation with the loan payment and regular withholdings moving as well.

Seeking Guidance

Now, I find myself needing to resolve these discrepancies. The primary question is: how do I handle this negative liability effectively?

Would it suffice to create a journal entry to shift these amounts from payroll liabilities to payroll expenses? If this is indeed the approach, what implications would arise on my balance sheet aside from simply eliminating the negative liability?

Conclusion

Navigating payroll intricacies after the passing of an employee can be a daunting task. It’s crucial to consult with a qualified professional or accountant to ensure compliance with tax laws and company procedures. If you or someone you know has faced a similar situation, feel free to share your insights or suggestions. Your experiences could provide valuable guidance for others in our community who are dealing with such sensitive matters.