Navigating Payroll Liabilities After the Passing of an Employee

The loss of an employee can be a challenging time for any organization, and when that individual passes away, it often leads to complications in payroll and tax processes. One such scenario unfolded recently in our organization, leaving us with questions about how to rectify payroll liabilities associated with a deceased employee.

The Situation

At the end of December 2023, our company experienced the unfortunate passing of one of its owners. The timing was particularly challenging, as payday for that period occurred in January 2024, after the employee’s passing. A paycheck was issued for this pay period, with regular deductions and a 401(k) loan payment withheld. To complicate matters further, a W-2 was generated at the end of January 2024.

Typically, issuing a W-2 for a deceased individual is not standard procedure, so I needed to address this issue when the deceased’s 2023 taxes were filed by the estate. Subsequently, I requested the payroll service company to amend the W-2 and issue a 1099, which initiated a series of complications within our payroll Accounting.

The Payroll Amendment Consequences

The amendment of the W-2 resulted in a journal entry from our payroll service, inadvertently creating a negative liability in both the loan and withholding accounts. Under normal circumstances, one would expect that these amounts would be refunded to the estate. However, due to the time lapse between the employee’s death and the tax filing, the estate had already transferred funds from the employee’s 401(k) accounts to another account, which included the loan payment and regular withholdings.

Seeking a Solution

I find myself at a crossroads, needing guidance on how to resolve this negative liability situation. Is the solution as straightforward as making a journal entry to transfer the amounts from payroll liabilities to payroll expenses? Additionally, I’m curious about the implications this adjustment would have on our balance sheet beyond simply eliminating the negative liability.

Moving Forward

As we navigate these complex circumstances, it’s crucial to address the negative payroll liabilities properly while ensuring compliance with tax regulations. Anyone who has experienced a similar situation is welcome to share advice or best practices for managing such intricacies in payroll and Accounting.

If there are any professionals out there who specialize in payroll adjustments following a deceased employee’s passing, your input would be invaluable. Let’s work together to find clarity and ensure our financial records reflect accurate obligations. Thank you for your assistance as we strive