Correcting Payroll Discrepancies After the Death of an Employee: A Case Study
Navigating payroll issues can be challenging under normal circumstances, but they can become particularly complex when dealing with the unfortunate passing of an employee. This blog post will explore a specific scenario involving the amendment of a deceased employee’s W2 and the subsequent complications that arose, as well as potential solutions for resolving the related financial discrepancies.
Background
Recently, a company faced a unique challenge when one of its owners passed away at the end of December 2023. Even though the employee had passed, a paycheck was still issued in 2024 for the pay period, which included typical deductions such as a 401k loan payment and other regular withholdings. To complicate matters further, a W2 was generated at the end of January 2024 for the deceased employee—a practice that typically violates IRS regulations.
As the new member of the payroll team, I was tasked with rectifying this situation while the deceased employee’s tax filings were being managed by the estate’s executor. I contacted our payroll service provider to request that they amend the W2 and correctly issue a 1099, as is customary for deceased individuals.
The Consequence of the Amendment
Upon submitting the request for the W2 amendment, a journal entry (JE) was created by the payroll service that resulted in a negative liability in both the loan and withholding accounts within our payroll system. This occurrence raised questions regarding the treatment of these funds, especially given the time that lapsed between the owner’s death and the filing of taxes. By the time the estate was prepared to settle these accounts, the funds in the employee’s 401k had already been moved, rendering the original loan and withholdings unavailable for refund.
Finding a Solution
Now, the pressing question is: how do we rectify this financial mishap? One potential solution is making a journal entry to transfer these negative liabilities to payroll expenses. However, it’s important to understand the implications of this adjustment on our balance sheet.
By adjusting the accounts in this manner, we would effectively clear the negative liability, which would streamline our financial records. However, this also means that our payroll expenses would reflect an increased amount, which could affect future budgeting and financial forecasting.
Conclusion
In financial matters, especially those involving unusual circumstances such as the passing of an employee, it is crucial to approach each issue methodically and with care. Addressing payroll liabilities promptly can prevent
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