Resolving Payroll Challenges after the Loss of an Employee: A Step-by-Step Guide

The unexpected passing of an employee can lead to unique complications in payroll management, particularly when it involves tax documentation and adjustment processes. Recently, a situation arose where an amendment to a deceased employee’s W-2 resulted in significant negative payroll liabilities, raising important questions for employers navigating these sensitive circumstances.

The Scenario

In this case, an employee tragically passed away at the end of December 2023. The last scheduled payday for that employee fell into January 2024, during which the employee received a paycheck that included both routine deductions and a payment towards a 401(k) loan. A W-2 was subsequently generated for the employee at the end of January 2024. However, it’s important to note that distributing W-2 forms for deceased individuals is generally not permissible.

The Complications

Due to the circumstances, the estate manager, unfamiliar with the previous payroll practices, requested that the payroll service amend the W-2 and issue a 1099 form instead. This amendment resulted in a journal entry (JE) from the payroll service that inadvertently created a negative balance in the loan and withholding liability accounts.

Typically, in a timely resolution, any amounts owed would be refunded to the deceased’s estate. However, due to delays in filing, the estate had already redistributed the funds from the employee’s 401(k) account, complicating matters further and eliminating the source from which the loan payments were originally deducted.

Seeking Solutions

Now, you may wonder: How can this issue be rectified?

1. Adjusting Journal Entries: One potential solution is to create a journal entry to transfer the negative amounts from the payroll liabilities to payroll expenses.

2. Understanding the Impact: Before proceeding, it’s crucial to assess the consequences of this adjustment on the balance sheet. While this move would alleviate the negative liability, it may also influence financial statements, portraying a clearer financial position while simultaneously adjusting expense ratios.

Next Steps

If you’re managing a similar situation, it’s advisable to work closely with your payroll service provider to ensure compliance and accuracy in all adjustments. It might also be beneficial to consult with a financial advisor or accountant who specializes in payroll matters for further assistance.

As we navigate these complexities, it’s vital to prioritize transparent communication, both internally with your team and externally with the estate, to ensure all processes are handled with care and respect.