Navigating Payroll Challenges After the Loss of an Employee

Dealing with financial matters following the death of an employee can often be complicated and fraught with challenges. Recently, an unfortunate situation arose in which a company owner passed away at the end of December 2023. With the payroll cycle falling in 2024, an intricate web of payroll and tax regulations came into play that has left the company grappling with unresolved issues.

The Situation

In January 2024, the deceased employee’s payroll for the last pay period was processed, leading to the issuance of a paycheck that included deductions for a 401(k) loan payment as well as regular withholdings. Complicating matters, a W-2 was issued for this individual, which, as it turns out, is typically not acceptable for a deceased person.

Since I wasn’t on the payroll team when this incident occurred, I was tasked with addressing the ramifications during the estate’s tax filing process. Consequently, I reached out to our payroll service provider to amend the W-2 and convert it into a 1099, an appropriate action given the circumstances.

However, this amendment initiated a series of adjustments that resulted in a journal entry from the payroll service, inadvertently creating a negative liability in our loan and withholding accounts.

The Challenge

Given the time that had elapsed between the employee’s passing and the tax filing, funds within the 401(k) trust had already been transferred to another account. This transition raised immediate questions about how to resolve the negative payroll liabilities without impacting the estate’s remaining assets.

The key question at hand is: How can we effectively rectify this issue?

Potential Solutions

One potential course of action may involve creating a journal entry that moves these amounts from our payroll liabilities to payroll expenses. This approach could help eliminate the negative liability reported on our balance sheet. However, it’s crucial to understand the wider implications of this adjustment.

Impact on Your Financial Records

1. Clearing Negative Liabilities: The primary benefit of this adjustment would be to remove the negative liability, restoring balance to our financial accounts.

2. Reallocation of Funds: Moving amounts from payroll liabilities to payroll expenses will shift how we categorize these funds, impacting our income statement by increasing expenses without simultaneously increasing liabilities.

3. Long-Term Financial Health: It’s vital to assess how this adjustment aligns with our overall financial strategy. Ensuring compliance while maintaining a strong financial position will be essential during audits or