Addressing Payroll Complications Post-Employee Demise: A Guide for Business Owners

The loss of an employee is a challenging scenario for any organization, not only emotionally but also from an administrative standpoint. This is particularly true when it involves payroll and tax reporting matters. A recent case highlights the complexities that can arise when an employee passes away just before a payroll period and how their final compensation can create significant issues in payroll liability accounts.

The Situation

In December 2023, an unfortunate event occurred when one of the company’s owners passed away. He received a paycheck for the preceding pay period, which landed in 2024, with deductions for a 401(k) loan and other standard withholdings. Subsequently, a W-2 form was issued at the end of January 2024, an action that is typically not permissible for deceased individuals. This mistake necessitated subsequent actions taken to correct tax filings related to the estate.

The Complication

As the new staff member tasked with this issue, it became evident that amending the W-2 and replacing it with a 1099 was essential for filing the deceased employee’s 2023 taxes correctly. However, the amendment process inadvertently generated a journal entry (JE) from the payroll service that resulted in negative balances within the loan and withholding liability accounts.

While it is generally understood that such discrepancies may be rectified by refunding the corresponding amounts to the estate in a timely manner, the lapse of time in this case complicated matters. The estate had already transferred funds from the deceased employee’s 401(k) account to another account, meaning the original loan payment and regular deductions could no longer be processed as intended.

Seeking a Resolution

Now, there arises a crucial question: What steps can be taken to resolve this negative liability issue? One potential solution involves recording a journal entry that shifts these amounts from payroll liabilities to payroll expenses.

Implications of This Adjustment

Making this adjustment could clear the negative liability from your balance sheet; however, it’s essential to understand the broader implications. Shifting these amounts will increase your payroll expense accounts, which may affect profit calculations and tax liabilities for the current financial period.

It’s advisable to consult with a qualified accountant or payroll specialist to precisely navigate through these complexities and ensure compliance with tax regulations. They can offer tailored advice and solutions based on your company’s unique situation, ultimately providing peace of mind during a tumultuous time for the organization.

In conclusion, while managing payroll after the loss