Navigating Payroll Liabilities After the Loss of an Employee

In the delicate aftermath of the unfortunate passing of an employee, especially an owner, navigating payroll and tax liabilities can become quite intricate. This blog post discusses a complex scenario that many organizations might find themselves in and offers insights into resolving these financial challenges.

The Situation

Recently, a company faced a unique challenge when one of its owners passed away at the end of December 2023. The complication arose when payroll for that period was disbursed in 2024, resulting in a paycheck being issued to the deceased employee. This paycheck included standard deductions and a 401k loan payment. Unbeknownst to the current staff, a W2 was issued at the end of January 2024, which typically shouldn’t occur for a deceased individual.

The Complications with the W2

Due to the oversight of issuing a W2 posthumously, the estate was required to file taxes for the deceased employee. Since the staff member handling payroll at the time was not employed when this mistake happened, they had to reach out to the payroll service provider for assistance in amending the W2 and issuing a 1099 instead.

However, amending the W2 led to a journal entry (JE) from the payroll service, creating a negative liability in both the loan and withholding accounts. Ideally, in a more timely process, the company would refund the amounts to the deceased’s estate. Unfortunately, significant delays occurred between the employee’s passing and the tax filing. By that point, funds from the employee’s 401k accounts had already been transferred elsewhere, along with the corresponding loan payments and withholdings.

Finding a Solution

Now faced with the task of rectifying these payroll discrepancies, the primary question is how to best address the negative liabilities that have emerged. One potential resolution could involve making a journal entry to shift these amounts from payroll liabilities to payroll expenses.

But what does this adjustment entail for the company’s balance sheet?

Impact on Financial Statements

Transferring amounts from payroll liabilities to payroll expenses could effectively alleviate the negative liability on the balance sheet. By doing this, the negative amounts would be cleared, resulting in a more accurate representation of the company’s financial obligations.

It’s crucial, however, to understand that this reallocation may influence the overall expenses of the company, potentially affecting profitability reporting for that period. Those adjustments should be documented thoroughly to ensure clarity in financial reporting and compliance with Accounting standards.