Navigating Payroll Challenges Following the Loss of an Employee

The passing of an employee can create a complex web of payroll and tax issues, particularly when it comes to managing their final paycheck, deductions, and associated liabilities. A recent scenario shared by a company owner highlights the challenges they faced after an employee’s untimely demise at the end of December 2023, leading to significant complications in payroll reporting.

The Situation Unfolds

When the employee unfortunately passed away, the next scheduled payday occurred in 2024, resulting in the issuance of a paycheck that included deductions for a 401(k) loan and other withholdings. Moreover, a W-2 form was issued at the end of January 2024—a practice that is generally not permissible posthumously. This situation was further complicated by the fact that the company first learned of the issue during the estate’s tax filing process.

To rectify the matter, the payroll service was contacted to amend the W-2 and instead issue a 1099, which is typically appropriate for independent contractors or those not currently employed with the company. However, this amendment then triggered a journal entry (JE) from the payroll service, leading to a negative liability in both the loan and withholding accounts.

Understanding the Aftermath

Given the time that elapsed from the employee’s passing to the tax filings, the funds linked to the employee’s 401(k)—including loan payments and standard withholdings—had already been moved to different accounts under the estate’s management. This has left the payroll team wondering how to correctly adjust the books in light of these changes.

Finding a Resolution

To address this challenging situation, it might be necessary to make a journal entry that transfers those negative amounts from payroll liabilities to payroll expenses. However, it’s essential to consider the implications of such a move on your organization’s financial statements.

• Impact on Your Balance Sheet: Clearing out the negative liability would enhance the accuracy of your financial records, ensuring that your books reflect the actual obligations of the company. However, this adjustment would also shift the financial representation, impacting the overall expense reporting for the period.

Next Steps

1. Consult with a CPA or Financial Advisor: Before making any entries, it’s wise to seek expert advice to ensure compliance with Accounting standards and tax laws.

2. Document Everything: Maintain thorough documentation of all communications with the payroll service and the rationale behind any changes made in the Accounting records.