Navigating Payroll Challenges After the Loss of an Employee

The unexpected passing of an employee can create a series of complex financial scenarios for a business, particularly concerning payroll and tax obligations. A recent situation highlighted a distinct challenge when a company faced issues related to a deceased employee’s payroll records. Here’s a breakdown of the situation and potential solutions.

The Situation

In late December 2023, one of the company’s owners sadly passed away. However, the pay period for the associated payroll was not finalized until January 2024, resulting in the issuance of a paycheck. This check included standard deductions, such as 401(k) loan repayments. Following the event, a W-2 was generated for the deceased employee in January 2024. This form is typically not permissible for individuals who have passed away.

Because I wasn’t part of the team at the time of the incident, I found myself needing to take corrective action. As the estate filed the 2023 taxes, I reached out to our payroll service provider to amend the W-2, requesting that the deceased employee be issued a 1099 instead.

However, this amendment led to a journal entry (JE) from the payroll provider that created a negative liability in the loan and withholding accounts. Ideally, the company would refund these amounts back to the estate, but with the passage of time, the estate had already transferred the funds from the deceased employee’s 401(k) accounts, complicating matters further.

The Challenge

The main issue now is finding a solution to manage the negative liability created. Is the process as simple as adjusting the journal entries to shift these amounts from payroll liabilities to payroll expenses? Furthermore, I wonder about the implications such changes will have on the balance sheet—will it just resolve the negative liabilities, or is there more to consider?

Potential Solutions

To address this challenge, here are a few steps to consider:

1. Review Journal Entries: First, it’s essential to investigate the existing journal entries and understand the exact numbers involved. This will provide a clearer picture of what adjustments need to be made.

2. Adjust Liabilities: If it’s determined that the negative amounts can simply be moved to payroll expenses, then creating a journal entry to correct this may indeed be a straightforward solution.

3. Consult with Your Accountant: Given the intricacies involved with payroll adjustments and tax implications, it’s wise to collaborate with your Accounting professional. They can provide specific guidance tailored to your