Addressing Payroll Complications Following an Employee’s Passing: A Guide

Navigating payroll complexities can be especially challenging when faced with the unfortunate passing of an employee. Such scenarios often lead to confusion regarding tax documentation and liabilities. Recently, we encountered a situation that highlights these issues, particularly in relation to W-2 amendments and resulting payroll liabilities. Here’s a breakdown of the situation and some advice on how to tackle similar challenges.

The Situation

In late December 2023, one of the company’s owners passed away. Unfortunately, the payday for this pay period fell in 2024, at which point the deceased was issued a paycheck that included withholdings for a 401(k) loan payment as well as standard payroll deductions. To complicate matters, a W-2 was generated for this individual at the end of January 2024.

Typically, issuing a W-2 for a deceased employee is not permissible, and with the estate needing to file taxes, we requested assistance from the payroll service to amend the W-2 and issue a 1099 instead. However, the amendment resulted in a journal entry from the payroll service that created a negative liability in both the loan and withholding accounts.

Complications Arise

As time passed between the employee’s death and the tax filing process, the estate had already transferred funds from the employee’s 401(k) accounts. This included amounts for the loan payment and standard deductions, leading to further complications in reconciling our accounts.

The pressing question at this point is: How do we address and resolve the negative liability that arose from the W-2 amendment?

Potential Solutions

One initial approach to consider is creating a journal entry to reallocate the amounts from payroll liabilities to payroll expenses. This action can effectively clear the negative liability account. However, it’s essential to understand the broader implications this adjustment may have on your financial statements:

1. Balance Sheet Effects: This transfer will remove the negative figures from the liability account, but it will also increase your payroll expenses. This could affect your profitability figures for the current Accounting period.

2. Record-Keeping: Ensure that documentation is thorough, explaining the circumstances behind this transition. Having a clear Audit trail can be incredibly helpful for future reference and in responding to any potential inquiries.

Final Thoughts

It’s advisable to consult with a financial professional or accountant with expertise in payroll and tax regulations to ensure compliance and rectify any discrepancies effectively. Addressing these