Navigating Payroll Challenges After the Loss of an Employee: A Guide

The unexpected passing of an employee can lead to considerable complexities in company payroll, especially when it comes to handling tax documentation. Recently, one business faced a challenging situation following the death of one of its owners at the end of December 2023. The complications that arose are a cautionary tale for all companies, and understanding how to address these financial discrepancies is crucial.

The Scenario

Tragically, the owner passed away just as the 2023 payroll period was closing. As a result, his payroll for that period, which fell in January 2024, had already been processed. This included regular deductions, such as a 401(k) loan payment. In the subsequent month, a W-2 was issued for the deceased employee, which, according to payroll regulations, should not happen posthumously.

To rectify this oversight, I was tasked with the challenge of requesting an amendment to the W-2 from our payroll service provider as the deceased’s taxes were being filed by the estate. The plan was to replace the W-2 with a 1099 to ensure compliance with IRS guidelines.

The Aftermath

The amendment for the W-2 unfortunately resulted in a journal entry (JE) from our payroll service that left a negative balance in the liability accounts related to both the loan payment and withholdings. Moreover, due to the time that elapsed between the event of the death and the tax filings, the estate had already transitioned the funds from the employee’s 401(k) into another account. This raised additional questions about how to correct the negative liabilities now sitting on the company’s accounts.

Steps to Remedy the Situation

The primary question is: how do we address this negative liability? One potential solution is to record a journal entry that reallocates those amounts from payroll liabilities to payroll expenses. However, it is vital to consider the broader implications of this action.

By moving amounts from liabilities to expenses, the immediate negative balances would be addressed. Still, there are factors to bear in mind. Adjusting the balance sheet in this way will impact the company’s financial statements, particularly its reported liabilities and expenses.

Moving Forward

It’s imperative to consult with a certified accountant or a payroll professional while navigating these complexities to ensure compliance with all regulations and to confirm the best course of action. The timely resolution of payroll issues following the loss of an employee not only mitigates financial discrepancies but also demonstrates