Navigating Payroll Complications After an Employee’s Passing: Seeking Guidance

The unexpected death of an employee can introduce various complexities within a company’s payroll and Accounting practices. Recently, a situation arose concerning a deceased employee that led to complications with the W2 amendment and subsequent payroll liabilities, prompting questions about how to address these issues effectively.

Contextual Background

In late December 2023, a company owner sadly passed away. As part of the payroll process, the employee received a paycheck in early 2024 that included deductions for their 401(k) loan payment and other regular withholdings. An additional W2 form was issued for the deceased individual at the end of January 2024, a practice that is generally not permissible for deceased employees.

This situation became more complex when the estate of the deceased was preparing to file tax documents. The individual overseeing payroll at the time, who was not part of the firm when the initial payroll actions took place, needed to engage the payroll service provider to amend the W2 to reflect the correct tax information and to issue a 1099 instead.

Complications Arise

After requesting the W2 amendment, an unexpected journal entry was generated by the payroll service, resulting in a negative liability across the loan and withholding accounts. Typically, in a more timely scenario, any amounts associated with payroll liabilities would be refunded to the estate. However, due to delays in addressing the situation following the employee’s death, the estate had already transferred funds from the deceased’s 401(k) account, including the relevant loan payment and deductions.

Seeking Solutions

This predicament raises a significant question: How can these discrepancies be resolved effectively?

One potential solution might involve making a journal entry to adjust the negative liability by reallocating those amounts from payroll liabilities to payroll expenses. However, it’s crucial to understand the broader implications of this action on the company’s financial statements, particularly the balance sheet.

Conclusion

Addressing payroll issues following the passing of an employee can be intricate and requires careful handling to ensure compliance and accuracy. It’s recommended to consult with a qualified accountant or financial advisor who specializes in payroll matters to discuss the best course of action. This guidance becomes invaluable in rectifying the financial records while ensuring that both the company and the deceased employee’s estate are treated fairly and legally in such sensitive circumstances.