Navigating Posthumous Payroll Complications: A Guide for Employers

The complexities of payroll management can become even more intricate in the unfortunate event of an employee’s passing. One company owner experienced this firsthand when a valued member of their team passed away at the close of December 2023. This led to a series of payroll and tax ramifications that left the company grappling with unexpected negative liabilities.

The Situation

Following the owner’s death, payroll was processed for the final period in 2024. A paycheck was issued, deducting a 401(k) loan repayment along with standard deductions. However, confusion arose when a W-2 was generated for the deceased employee at the end of January 2024, a practice that is typically not permitted after an employee has passed away.

Not having been part of the company at the time, I found myself tasked with resolving this issue when the deceased’s estate needed to file their 2023 tax returns. Inquiries to the payroll service led to an amendment of the W-2, which should have corrected the records and initiated the issuance of a 1099 for proper taxation.

Consequences of the W2 Amendment

The W-2 adjustment resulted in a journal entry from the payroll provider, which inadvertently created a negative liability on both the loan and withholding accounts. This situation is particularly challenging because by the time the estate was handling tax matters, they had already moved funds from the employee’s 401(k) into another account, which included the associated loan repayment and standard deductions.

Seeking a Solution

Understanding the urgency of this matter, I am seeking guidance on how to rectify the negative payroll liabilities. Would it be feasible to create a journal entry that transfers these amounts from the payroll liabilities account to payroll expenses? If this approach is viable, what impact would it have on the overall balance sheet besides eliminating the negative liability?

Conclusion

Navigating the complexities associated with payroll after an employee’s death can be daunting. However, by taking proactive measures such as properly amending W-2s and remaining vigilant in tracking liabilities, businesses can mitigate the unintended consequences that often arise in these sensitive situations. If you’re facing similar challenges, consultation with a financial professional may provide clarity and ensure compliance with relevant regulations while safeguarding the interests of both the company and the affected estate.