Navigating Payroll Challenges after the Untimely Passing of an Employee

The loss of an employee is always a difficult moment for any organization, especially for the team and the business owners left to navigate the complexities that arise from such an event. Recently, a situation came to light regarding a deceased employee that has prompted some pressing questions about payroll liabilities and tax compliance.

The Scenario

Unfortunately, one of our company’s owners passed away in December 2023. As fate would have it, the payroll date for that time fell in 2024, and he was issued a paycheck that included withholdings for a 401(k) loan and other regular deductions. Compounding matters, a W-2 was generated for him at the end of January 2024, which is typically considered inappropriate for someone who has deceased.

As I was not part of the team during this period, I had to take the initiative to request an amendment to the W-2 from our payroll service. This was necessary to accommodate the tax filings for the estate of the deceased employee, for which a 1099 needed to be issued instead.

The Ripple Effect

The amendment process led to the payroll service generating a journal entry that resulted in a negative liability reflected in our loan and withholding accounts. From what I have gathered, in normal circumstances, the company would issue a refund to the estate for these amounts. However, due to the time that elapsed between the employee’s passing and the tax filing, the estate had already transferred funds from the employee’s 401(k) to another account. Consequently, this has complicated the situation, as both the loan and withholding payments are now intertwined with funds that are no longer accessible.

Seeking a Resolution

Now, I find myself at a crossroads, unsure of how to rectify the negative liability created by this scenario. My initial thought is whether I can simply create a journal entry to adjust these amounts from payroll liabilities to payroll expenses. If that is indeed the case, I wonder what implications this adjustment would have on our balance sheet, aside from eliminating the negative liability.

Request for Guidance

I would greatly appreciate any insights or suggestions from those who have navigated similar situations. Specifically, if you have experience dealing with payroll amendments following the death of an employee, your expertise could be invaluable in resolving this matter. How have you handled adjustments and what recommendations do you have for ensuring compliance while maintaining accurate financial records?

This is a learning experience for all of us and any advice