Navigating Payroll Challenges After the Loss of an Employee: A Case Study

The landscape of payroll management can become particularly complicated when unforeseen events, such as the passing of an employee, occur. A recent situation illustrates these challenges, providing valuable insights for business owners and payroll administrators alike.

The Scenario

At the end of December 2023, a key employee of a company passed away. Although the pay period closed in December, the associated payday fell in January 2024. During this period, the employee was issued a paycheck that included standard deductions, such as a 401(k) loan payment. At the end of January 2024, a W-2 was generated for the deceased employee—a move that is typically deemed inappropriate for someone who has passed away.

As the individual who took over payroll duties post-incident, I found myself navigating a complex situation when the deceased employee’s estate began filing 2023 taxes. I reached out to our payroll service to amend the W-2 and issue a 1099 instead, which was the recommended approach.

However, the amendment process triggered an unexpected journal entry from our payroll service, resulting in a negative balance in our loan and withholding liability accounts. Given the time that had elapsed between the employee’s death and the tax filing, the estate had already relocated the 401(k) funds, along with corresponding loan payments and withholdings, complicating matters further.

Searching for a Solution

This left me with the daunting question: How can we rectify this situation?

Would simply creating a journal entry to reclassify those amounts from payroll liabilities to payroll expenses resolve the issue? And what implications would this adjustment have on the balance sheet, aside from eliminating the negative liability?

Steps to Consider

1. Conduct a Thorough Review: Examine all relevant payroll records and ensure that all necessary modifications to the W-2 and 1099 forms have been accurately completed, allowing you to understand the full impact of the changes made.

2. Consult with Your Payroll Provider: Collaborating with your payroll service is crucial. They can offer specialized guidance on adjusting entries and correcting any discrepancies resulting from the prior amendments.

3. Create a Journal Entry: If it is indeed appropriate to move amounts from payroll liabilities to payroll expenses, ensure that you document this adjustment clearly. This step should eliminate the negative balance in the liability accounts and bring clarity to your financial statements. Just be cautious to record how these entries affect your overall financial health