Navigating Payroll Liabilities After the Passing of an Employee: Seeking Solutions

When a valued employee passes away, the ripple effects can impact various aspects of a business, particularly in relation to payroll and tax documentation. A recent situation has come to light involving the unfortunate passing of one of the company’s owners at the end of December 2023. The challenges arising from this event have raised concerns about the proper handling of payroll Accounting.

The Situation at Hand

In this case, the company’s payroll for the pay period coincided with the new year in 2024, resulting in the issuance of a paycheck that included standard deductions as well as a repayment for a 401k loan. End-of-year tax processes followed, leading to the generation of a W2 for the deceased employee in January 2024. However, issuing a W2 for someone who has passed away is typically not permissible.

As I was not part of the team when this incident took place, I faced challenges while filing the deceased’s 2023 taxes on behalf of the estate. In order to correct the tax records, I reached out to our payroll service provider to amend the W2 and instead issue a 1099, which is appropriate for such circumstances.

Consequences of the W2 Amendment

The amendment process initiated a journal entry (JE) from the payroll service provider, unintentionally resulting in negative liabilities within our loan and withholding liability accounts. Typically, under normal circumstances, businesses would initiate a refund of these amounts to the estate. However, due to the time lapse between the owner’s passing and the tax filing, the estate had already reallocated funds from the employee’s 401k accounts. This created a complication, as both the loan repayment and regular withholding amounts had also been shifted during this process.

Finding a Resolution

The primary question at this juncture is how to rectify these negative liabilities on our balance sheet. One potential solution appears to be making a journal entry to transfer the amounts from the payroll liabilities to payroll expenses. It’s essential to understand the implications of this action beyond simply clearing the negative liability on the books.

Understanding the Financial Impact

Adjusting these liabilities may not only address the immediate Accounting discrepancies but could also affect the overall financial picture of the business. Transitioning amounts from liabilities to expenses will result in an increase in payroll expenses, which, in turn, will impact the profit and loss statements. This may also influence key financial ratios and the overall health of the business