Navigating Payroll Complications After an Employee’s Passing

The process of managing payroll can become especially complex during sensitive times, such as the death of a company employee. Recently, I encountered a challenging situation following the passing of one of our company owners at the end of December 2023. As the payroll dates continued into the new year, this unfortunate event led to a series of financial complications that require careful navigation.

The Timeline of Events

In January 2024, during the payroll processing for the final pay period of the deceased owner, a paycheck was issued. This paycheck included deductions for both a 401(k) loan payment and standard payroll deductions. Additionally, a W-2 was generated at the end of January, reflecting earnings for the deceased, which I have since learned is prohibited for individuals who have passed away.

Since I was not with the company at the time of these transactions, I had to rely on the payroll service to amend the deceased employee’s W-2 and instead issue a 1099 tax form. However, this amendment resulted in a journal entry from the payroll company that introduced a negative liability to both the loan and withholding liability accounts.

The Impact on the Estate

Typically, when such situations arise, the company would reimburse the estate for any erroneous deductions. However, due to the delay in addressing the matter—largely due to the time involved in finalizing the deceased’s taxes—the estate had already transferred funds from the employee’s 401(k) account. This includes the loan payment and standard withholding amounts, complicating the refund process even further.

Seeking a Solution

I find myself in need of guidance on how to rectify this matter. My initial thought is that I might need to make a journal entry that would shift amounts from payroll liabilities to payroll expenses. My question is: would this approach suffice to address the negative liability, and what ramifications would it have on the balance sheet beyond merely eliminating the negative figures?

Conclusion

Situations like these involve a delicate balance of Accounting principles and ethical considerations. If you have encountered similar challenges or have expertise in payroll Accounting, I would greatly appreciate your insights on how to proceed effectively. Thank you for your support as I navigate the complexities of this unfortunate situation.