Navigating Payroll Challenges Following an Employee’s Passing

The process of managing payroll can become particularly complex in the unfortunate event of an employee’s death. This blog post outlines a situation involving the amendment of a deceased employee’s W-2 and the subsequent challenges this may create for payroll liabilities.

Background Context

Recently, a company faced an issue after one of its owners passed away at the end of December 2023. The unfortunate timing of his passing coincided with payday in 2024, leading to the issuance of a paycheck that included deductions for a 401(k) loan and standard withholdings. Despite the employee’s death, a W-2 form was generated in January 2024—a practice which can be problematic and is generally not permissible under IRS guidelines when it comes to deceased individuals.

The Dilemma

With the payroll process in motion, management had to navigate the amending of the deceased employee’s W-2 as his taxes were being filed by the estate. However, the payroll service company subsequently generated a journal entry (JE) that resulted in a negative liability in both loan and withholding accounts. This predicament arose largely because the estate promptly transferred the funds from the deceased’s 401(k) into another account, making it challenging to simply refund amounts back to the estate as would typically be expected under more timely circumstances.

Seeking Solutions

The question then arises—how can one rectify this complicated payroll situation? Understanding the Accounting implications is crucial. Is it enough to create a journal entry that shifts the negative amounts from payroll liabilities to payroll expenses? If undertaken, what impact will this have on the balance sheet beyond alleviating the negative liabilities currently present?

A Path Forward

To address these issues effectively:

1. Consult a Payroll Expert: It is beneficial to work with a payroll professional or accountant who can provide clarity on the appropriate steps to take given the unique circumstances.

2. Perform a Journal Entry: Making a journal entry to allocate the amounts from payroll liabilities to payroll expenses may indeed resolve the negative liability. However, ensure that this entry is documented and justified within your financial records.

3. Review Financial Statements: Examine how these adjustments affect not only the balance sheet but also the overall financial statements and income reporting for the business.

4. Future Prevention: Establish protocols for payroll management in the event of an employee’s death to ensure timely processing of deductions and paperwork in compliance with IRS regulations.

Conclusion

Dealing with payroll