Navigating Payroll Challenges After a Deceased Employee: A Guide
The passing of an employee is a sensitive time for any organization, and it can also complicate payroll processes, especially when it comes to tax filings and liability management. One such scenario recently unfolded at our company, and navigating through it has proven to be a journey filled with challenges.
In late December 2023, one of our company owners passed away. As fate would have it, the payroll for that period occurred in 2024, and a paycheck was issued to the deceased following standard procedures. This paycheck included deductions for a 401(k) loan repayment and other regular withholdings. At the end of January 2024, a W-2 form was issued for the deceased, which raised some flags, as it is generally not permissible to issue W-2s for individuals who have passed away.
Since I was not with the company during these events, the responsibility fell on me when it came time to address the deceased’s 2023 tax filings managed by their estate. To rectify the situation, I contacted our payroll service provider to amend the W-2 and reissue it as a 1099, which is more suitable for such cases.
However, the W-2 amendment led to the creation of a journal entry (JE) from the payroll service, resulting in a negative liability in both the loan and withholding accounts. Typically, it is expected that under normal circumstances, the company would reimburse these amounts to the estate. However, because significant time had passed between the employee’s death and the tax filing, the estate had already transferred funds from the employee’s 401(k) to another account, along with the loan payments and regular withholdings.
This leads to a pressing question: How can I correct this situation effectively?
One possible solution is to make a journal entry to adjust these amounts from payroll liabilities to payroll expenses. But this action prompts further considerations regarding its implications on our balance sheet. Primarily, while it may eliminate the negative liability, it will also affect the overall financial reporting and could change how we view payroll expenses moving forward.
In dealing with such complex issues, it’s essential to approach them methodically. Consulting with a financial expert familiar with payroll regulations and estate management can also provide additional insights and safeguard against potential pitfalls. If you find yourself in a similar situation, remember to document everything carefully and communicate with all parties involved to ensure a smooth resolution.
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