Navigating Payroll Challenges After the Passing of an Employee

The unfortunate passing of an employee can complicate payroll procedures, particularly if issues arise after their death. This scenario came to light following the death of one of the company owners at the end of December 2023, leading to unexpected complications in payroll and tax reporting.

The Situation

After the owner’s passing, payday for the corresponding pay period fell in January 2024. A paycheck was issued, which included standard deductions and a 401(k) loan payment. However, it was later discovered that a W-2 had been generated for this deceased employee, raising questions about its validity. According to IRS guidelines, issuing a W-2 for a deceased individual is not permissible.

As the new staff member tasked with handling the situation, I reviewed the case during the preparation of the estate’s 2023 tax filings. It was necessary to collaborate with our payroll service provider to amend the W-2 and issue a 1099 instead. This step is crucial for accurate tax reporting and ensuring the estate receives the correct documentation.

The Complications

Upon amending the W-2, the payroll service created a journal entry (JE) that resulted in a negative liability in both the loan and withholding accounts. Typically, under timely circumstances, the business would reimburse the relevant amounts to the estate. However, due to delays since the owner’s death and subsequent tax filings, the estate had already transferred funds from the employee’s 401(k) into a different account. This further complicated the matter, as loan payments and ordinary deductions were also affected.

Finding a Solution

The pressing question now is how to remedy this negative liability issue. One potential solution could involve creating a journal entry to adjust the funds from the payroll liability accounts to payroll expenses. However, it’s essential to understand the broader implications of this action.

Adjusting these entries would indeed clear the negative liabilities from the accounts, simplifying the financial statements. Nevertheless, it’s crucial to assess how this change might affect the overall balance sheet. By moving these amounts to payroll expenses, the company would reflect a more accurate financial picture, ensuring that liabilities and expenses are correctly aligned.

Final Thoughts

Navigating the intricacies of payroll following the death of an employee can be challenging. It’s vital to act swiftly and to accurately amend records to comply with IRS regulations while ensuring the estate is managed correctly. If you face a similar situation, consider consulting with a financial expert or tax advisor to ensure all necessary