Navigating Payroll Issues after a Deceased Employee’s Tax Filing: A Call for Guidance

Occasionally, businesses may encounter complex payroll situations, particularly when a valued employee passes away unexpectedly. Such was the case for one company in late 2023, which faced a challenging dilemma following the death of one of its owners. This situation not only impacted payroll practices but also raised pressing questions regarding tax reporting and liabilities.

The Scenario

The tragic passing of the company’s owner occurred at the end of December 2023, shortly before the payroll for that period was processed in 2024. Despite the unfortunate circumstances, a paycheck was issued for this period, complete with standard deductions, including a 401(k) loan payment. By the end of January 2024, the company prepared a W-2 for the deceased employee, a move that might not align with IRS regulations concerning deceased individuals.

As the new team member responsible for payroll at the time, I was tasked with addressing the situation when it came time to file the deceased’s taxes through the estate. I needed to reach out to the payroll service provider to request an amendment of the W-2, shifting the documentation to a 1099, which is generally more appropriate in scenarios like this.

Complications Arise

However, amending the W-2 triggered a journal entry (JE) from our payroll service that resulted in a negative liability within our loan and withholding accounts. Typically, if the circumstances had allowed for a more timely response, the business would have processed a refund of those withheld amounts back to the estate. Unfortunately, by the time we attempted resolution, the estate had already moved funds, including the employee’s 401(k), complicating matters further.

Seeking Solutions

In light of these complications, I’m reaching out to professionals with experience in payroll and tax regulation. Specifically, I need advice on how to resolve the negative liabilities now present in our accounts.

Is the solution as straightforward as executing a journal entry to transfer those funds from payroll liabilities to payroll expenses? If so, I’m keen to understand the repercussions this adjustment may have on our overall balance sheet beyond simply alleviating the negative balance.

Your insights and experiences with similar issues would be invaluable as we navigate this delicate situation. Thank you in advance for your assistance.