Navigating Payroll Challenges After an Employee’s Passing

The unfortunate passing of an employee can create a cascade of complexities for businesses, especially when it comes to payroll and tax filings. A recent situation highlights the challenges faced by one company after the death of a key staff member at the end of December 2023.

The Context

With the employee’s passing occurring just before the new year, the final paycheck was processed in 2024. This paycheck included standard deductions, such as a 401(k) loan repayment. However, complications arose when a W-2 was generated at the end of January 2024 for this deceased employee—a practice that is generally not acceptable under IRS guidelines.

Since the individual who dealt with this issue was not with the company at the time of the employee’s death, they faced additional challenges while helping the estate file taxes for 2023. They reached out to the payroll service to amend the W-2 and issue a 1099 instead, which led to an unforeseen negative payroll liability surfacing in the accounts.

The Issue at Hand

The amendment created by the payroll service resulted in journal entries (JE) that left the loan and withholding liability accounts in a negative position. Under normal circumstances, the business would refund the estate for these liabilities; however, due to the elapsed time between the employee’s death and the estate’s tax filing, the funds had already been transferred out of the employee’s 401(k) account.

Seeking Solutions

Now, the pressing question is how to correct this negative liability situation. One potential remedy is to make a journal entry to transfer those amounts from the payroll liabilities to payroll expenses. This adjustment raises a critical question: What implications would this action have on the company’s balance sheet, aside from alleviating the negative liability?

Moving Forward

When making such adjustments, it’s crucial to consider the broader financial picture. Transferring the amounts from payroll liabilities to payroll expenses can simplify the Accounting but may also impact profit margins and overall financial reporting.

It’s advisable to consult with a certified public accountant (CPA) or payroll specialist who can provide tailored advice specific to the company’s circumstances. They can offer insight into the best practices for managing payroll after an employee’s death and ensure all filings align with IRS regulations.

Navigating the complexities of payroll after the loss of an employee can be daunting, but with the right knowledge and support, businesses can regain control over their financial responsibilities.