Navigating Payroll Challenges After the Passing of an Employee: Seeking Guidance

The unexpected loss of an employee can bring about numerous challenges, particularly when it comes to managing their payroll and tax obligations. As we navigate through these complexities, a recent situation has highlighted some critical steps and considerations that need to be addressed when amending payroll for a deceased employee.

The Situation

At the close of December 2023, one of our company owners unfortunately passed away. Due to the timing of the paycheck cycle, he received a paycheck in early 2024. This paycheck included various deductions, such as a 401(k) loan payment and standard deductions. Following this, a W-2 form was generated for him at the end of January 2024, despite the fact that issuing a W-2 for a deceased employee is typically not permissible.

Since I was not in the organization at the time of these events, it fell upon me to request an amendment of the W-2 from our payroll service when the estate’s 2023 tax filings were being prepared. This amendment led to a journal entry (JE) being created by the payroll service, resulting in a negative balance in both the loan and withholding liability accounts on our books.

The Complication

Under normal circumstances, it is understood that the business should refund these amounts to the estate. However, due to the delayed timeline between the employee’s passing and the tax filing, the estate had already relocated funds from the deceased’s 401(k) accounts. This means that the necessary loan payments and standard withholdings have also been transferred elsewhere.

The Solution?

The pressing question is: how do we rectify this situation?

One possible solution could be to create a journal entry to reclassify the amounts from payroll liabilities to payroll expenses. However, this approach raises additional questions about the impact on our balance sheet. While addressing the negative liability is crucial, we need to understand how this reclassification will affect our financial statements moving forward.

Moving Forward

In navigating these payroll complexities, especially after such an unfortunate event, it’s essential to seek the right guidance. Consulting with an experienced accountant or payroll specialist can provide clarity on how to proceed and ensure compliance with tax regulations while also protecting the company’s financial integrity.

If you have encountered similar challenges or have insights on how to manage payroll after the loss of an employee, your thoughts and suggestions would be greatly appreciated. Sharing experiences can significantly help others who may find themselves in the same situation.