Navigating Payroll Challenges After the Loss of an Employee: Seeking Solutions

The sudden passing of a company owner can lead to unexpected challenges, especially when it comes to payroll and tax documentation. Recently, we’ve encountered a situation involving an employee who passed away at the end of December 2023, which has raised several questions about the proper handling of their payroll records.

The Situation: Unearthing Payroll Complications

After the individual’s passing, a paycheck was still issued during the subsequent payroll period in 2024. This paycheck included deductions for a 401(k) loan repayment and other regular withholdings. Furthermore, the estate received a W-2 form for the deceased employee in January 2024, which raised concerns as it is generally understood that issuing a W-2 for a deceased employee is not permissible.

Due to my timing of joining the firm post-incident, I had to liaise with our payroll service provider to amend the W-2 and subsequently issue a 1099 for the tax filings associated with the deceased employee’s estate. However, as a result of this amendment, we generated a journal entry that resulted in a negative balance within our payroll liability accounts, particularly affecting the loan and withholding liabilities.

Given the delay in addressing this issue, the estate has already transferred funds originally held in the employee’s 401(k) to another account, which complicates matters further. My primary concern is how to rectify the negative liability without severely impacting our financial statements.

Finding a Resolution: The Path Forward

To amend this situation, I’m considering whether it would suffice to create a journal entry that relocates the negative amounts from the payroll liabilities into payroll expenses. It’s imperative to understand how this adjustment may affect our balance sheet.

While such a journal entry could clear the negative liability, it’s crucial to evaluate the broader implications on our financial statements. Moving these amounts to payroll expenses could increase our costs for the period, but it also cleans up our liabilities and more accurately reflects our current financial standing.

Conclusion: Seeking Guidance and Clarity

As we navigate the complexities arising from the loss of an employee, it’s critical to ensure that our payroll processes are aligned with legal requirements and best practices. If anyone has encountered similar challenges or has insights into rectifying such payroll discrepancies, your guidance would be invaluable. Addressing these issues timely not only supports compliance but also maintains the integrity of our financial records.