Navigating Payroll Challenges Following an Employee’s Passing

When the unfortunate event of an employee’s passing occurs, the implications for payroll can be complex and often overwhelming, especially for those who may not have been present during the original transactions. Such was the case for a business grappling with payroll errors following the death of one of its owners at the end of December 2023.

The Situation at Hand

The company’s payroll cycle meant that the deceased owner was issued a paycheck in early 2024, which included deductions for a 401k loan and standard withholdings. To complicate matters, a W2 for the deceased was generated in January 2024, despite the fact that federal guidelines prohibit issuing W2 forms for deceased employees.

As the current payroll administrator, I was tasked with addressing this situation after the estate began filing the 2023 taxes. I reached out to our payroll service provider to request an amendment to the W2, leading to the issuance of a 1099 instead. However, this amendment triggered a journal entry from the payroll service that resulted in a negative liability across accounts related to loans and tax withholdings.

Understanding the Present Dilemma

Given the timeline – with significant delays between the owner’s death and tax filings – the estate had already transferred funds from the deceased’s 401k accounts, complicating the refund process. As a result, the usual corrective measures that would involve refunding the estate have become less straightforward.

Seeking a Solution

So, how do I rectify this negative liability on our balance sheet? One potential solution is to create a journal entry that reallocates those negative liability amounts from payroll liabilities to payroll expenses.

But there are important implications to consider. First, while this adjustment would eliminate the negative balance, it would also shift the company’s payroll liabilities to expenses on the balance sheet. This change could impact various financial metrics, such as the overall profitability and cash flow visibility of the business.

Conclusion

Navigating payroll in the aftermath of an employee’s passing requires careful consideration and strategic adjustments. As I look to resolve this issue, it is essential to understand the consequences of any journal entries made, ensuring that we remain compliant and that our financial statements accurately reflect the company’s position. Should you find yourself in a similar scenario, consulting with a financial advisor or payroll specialist may provide additional insights and guidance on navigating these complex situations.