Resolving Payroll Liabilities After the Untimely Passing of an Employee

In the midst of navigating the complexities of payroll and taxes, I found myself facing a particularly challenging situation following the death of an employee. One of the owners of our company passed away at the end of December 2023, and this led to a series of complications concerning payroll and tax compliance.

During the pay period that followed, which coincided with 2024, the deceased owner was issued a paycheck that included deductions for a 401(k) loan repayment and other standard withholdings. At the end of January 2024, a W-2 was generated for him, despite the fact that this practice is generally prohibited for deceased individuals.

As I wasn’t part of the company at the time of these transactions, I needed to take steps to rectify the situation. When the estate was preparing the 2023 tax returns, I requested that the payroll service provider amend the W-2 and issue a 1099 instead.

However, this amendment resulted in a journal entry from the payroll service that inadvertently created a negative balance in our loan and withholding liability accounts. From my understanding, in a more timely filing process, the business would typically refund these amounts back to the estate. However, considerable time had passed between the employee’s death and the tax filing, which led the estate to move the funds from the employee’s 401(k) account to another account. Consequently, the loan repayments and withholdings were also moved.

Now, I’m faced with the question of how to properly address this negative liability on our books. Would it be feasible to create a journal entry to transfer these amounts from payroll liabilities to payroll expenses? If so, what implications would this have on our balance sheet beyond simply eliminating the negative liability?

Addressing this issue is crucial for maintaining accurate financial records and ensuring compliance with payroll regulations. I’m eager to hear insights from others who might have encountered similar situations or guidance on the best practices to resolve this matter.