Navigating Payroll Liabilities After the Loss of an Employee: A Guide

Losing an employee is a challenging time for any organization, and it brings unique complications, particularly in handling payroll and tax responsibilities. Recently, a situation arose that highlights these complexities, wherein an unfortunate event significantly impacted payroll accounts. Here’s a breakdown of a similar scenario and how to navigate these waters effectively.

The Scenario

In this particular case, a company owner passed away at the end of December 2023, a pivotal moment that prompted several payroll and tax implications. As fate would have it, payday for the final pay period occurred in 2024, leading to the issuance of a paycheck that included standard deductions such as a 401k loan payment. To compound the confusion, a W-2 was issued at the end of January 2024—an action generally not permissible for a deceased individual.

Due to the timing of events, the responsibility of resolving these payroll issues fell into the hands of a new company employee. Upon learning of the situation while assisting with the estate’s tax filings, an amendment was requested from the payroll service provider to rectify the W-2—a step that led to the issuance of a 1099 instead.

The Complications

Amending the W-2 introduced a journal entry (JE) from the payroll company, resulting in a negative liability in both the loan and withholding accounts. Typically, in more straightforward situations, these overpayments would be refunded to the deceased employee’s estate. Unfortunately, by the time the amendment was processed, funds had already been transferred elsewhere, making the repayment more complex and leaving the liability hanging.

Seeking Solutions

The pressing question now is: how do you resolve this tangled mess? One possible solution includes making a journal entry to transfer the negative liabilities to payroll expenses. But what should you be mindful of during this process?

Understanding the Impact on Financial Statements

1. Clearing Negative Liabilities: Moving amounts from payroll liabilities to expenses can help eliminate the negative balances, thus cleaning up the financial statements.

2. Balance Sheet Considerations: While this action will resolve the apparent negative liability, it’s crucial to understand how this adjustment represents an expense for the company. Although it clears the balance sheet, it could reflect an unusual or unexpected expense, which may warrant further discussion or justification during financial reviews.

3. Communication is Key: Don’t hesitate to consult with your Accounting team or a financial advisor. They can provide