Navigating Payroll Challenges Following an Employee’s Passing

Dealing with payroll issues can be complex, especially under sensitive circumstances such as the death of an employee. A situation has arisen in our company where we must address the payroll liabilities associated with a deceased employee who passed away at the end of December 2023.

The timeline in this case poses a significant challenge. The employee passed away in late December, but payday for that period occurred in January 2024. To complicate matters further, this individual received a paycheck that included deductions for a 401(k) loan as well as regular tax withholdings. Subsequently, a W-2 form was issued at the end of January 2024, which, as I have learned, is generally not permissible after an employee’s death.

As someone who wasn’t part of the company when these events transpired, my involvement came during the estate’s tax filing process for 2023. At that point, I had to request an amendment from our payroll service to correct the issuance of the W-2 and instead provide a 1099 form for the deceased employee.

This amendment resulted in a journal entry from our payroll provider that has consequently left a negative balance in both the loan and withholding liability accounts. It is my understanding that, under typical circumstances, the company would issue a refund to the estate for those amounts. However, due to the elapsed time between the employee’s death and the filing of taxes, the estate had already redistributed the funds from the employee’s 401(k), including the loan payment and withholding amounts.

Now we are left with the pressing question: how can we rectify this situation?

One potential solution could involve creating a journal entry to transfer these amounts from the liabilities category into payroll expenses. However, I am curious about the broader implications this action may have on our balance sheet, particularly beyond simply eliminating the negative liability.

As we navigate this issue, it is crucial to seek guidance on best practices for ensuring compliance and maintaining the integrity of our financial reporting. If anyone has insights or experiences dealing with similar situations, your advice would be greatly appreciated. Let’s work together to find the most efficient path forward in addressing this challenging payroll predicament.