Addressing Payroll Complications Following the Loss of an Employee

The passing of an employee is always a challenging situation for a business, particularly when it comes to managing payroll and tax implications. A recent scenario faced by a company highlights several complex financial issues that can arise following an employee’s death.

Background

In late December 2023, one of the business owners passed away. Unfortunately, despite the tragedy, payroll processing continued, and a paycheck was issued for the final pay period, which included deductions for a 401k loan and regular withholdings. Compounding the issue, a W-2 was generated at the end of January 2024 for the deceased employee—a practice that raises complications, as it is generally not permissible to issue tax documents for someone who has passed.

Complications Arise

As the company’s new payroll coordinator, I encountered these problems while assisting with the filing of the deceased employee’s 2023 taxes through the estate. After consulting the payroll service, it became necessary to amend the W-2 and issue a 1099 instead. However, this adjustment led to a journal entry (JE) from the payroll service that created a negative balance in the loan and withholding liability accounts.

Typically, if a business takes timely action following the death of an employee, it can refund any withheld amounts back to the estate. Unfortunately, due to delays in filing, the estate had already transferred funds from the employee’s 401k accounts, along with the associated deductions, to other accounts.

Seeking Solutions

Now, the pressing question is: how can I rectify the negative liability situation left over from these events? Would a simple journal entry to reallocate those amounts from payroll liabilities to payroll expenses suffice? If this is indeed the solution, what additional impact might that adjustment have on the business’s balance sheet, aside from eliminating the negative liability?

Finding the Right Path Forward

To address these questions effectively, it’s advisable to consult with a financial professional or accountant who understands payroll regulations and estate management. They can provide insights tailored to the specific circumstances and ensure compliance with tax regulations. Moreover, they can help clarify the implications of any journal adjustments on the overall financial health of the business.

Navigating payroll complexities after the loss of an employee may be daunting, but with the right approach and support, it is possible to resolve these issues while maintaining respect for the deceased’s estate and ensuring the accuracy of the company’s financial records.