Although it may be an uncomfortable topic, being prepared to handle a deceased employee's wages and taxes will make the potential situation less complicated while keeping you in compliance with federal and state laws.
The death of an employee is not something we like to think about and can be a very difficult and confusing scenario for all coworkers involved; administrative payroll and HR tasks necessary to ensure the employee’s wages are handled properly are often put off.
Although it may be an uncomfortable topic, being prepared will make the potential situation less complicated to handle in the future - not to mention keep you in compliance with federal and state laws.
The payroll department needs to be informed of the death as soon as possible as they will need to freeze all wages until proper documentation has been received (i.e. death certificate and form W-9 for beneficiary or estate). After the death has been reported, the following issues need to be addressed.
- Any uncashed paychecks that were issued to the employee before his or her death should be canceled.
- A new check should be issued to the employee’s estate or beneficiary with the same taxes withheld as the original check.
The employer must reach out to the employee’s estate to start gathering information such as the estate or beneficiary name. In most cases, unpaid wages are still owed to the employee at the time of death, so at least one more final check will need to be paid to the estate or beneficiary.
Deceased employee’s wages - Instructions from IRS Form 1099
For wages paid to the estate during the year when the employee dies, the accrued wages, vacation pay, and other compensation paid after the date of death must be reported. If the payment was made in the same year as the employee’s death, you must withhold social security and Medicare taxes on the payment and report them only as social security and Medicare wages on the employee’s Form W-2. This ensures that proper social security and Medicare credit is received.
On the Form W-2, show the payment as social security wages (box 3), Medicare wages and tips (box 5) and the social security and Medicare taxes withheld (boxes 4 and 6). You do not need to not show the wage payment in box 1 of Form W-2.
If you made the payment after the year of death, do not report it on Form W-2, and do not withhold social security and Medicare taxes. Wages paid in the year(s) following the employee’s death are not subject to FIT, FICA or FUTA taxes.
Whether the payment is made in the year of death, or after the year of death, you also must report any payment to the estate or beneficiary on Form 1099-MISC. Report the payment in box 3 (rather than in box 7, as specified in Rev. Rul. 86-109, 1986-2 C.B. 196).
Enter the name and TIN of the payment recipient on Form 1099-MISC. For example, if the recipient is an individual beneficiary, enter the name and social security number of the individual; if the recipient is the estate, enter the name and taxpayer identification number of the estate. General backup withholding rules apply to this payment.
Example of Payments and Withheld Wages
Before Employee A’s death on June 15, 2018, A was employed by Employer X and received $10,000 in wages. From those wages, $1,500 of federal income tax was withheld.
When A died, X still owed A $2,000 in wages and $1,000 in accrued vacation pay. The total of $3,000 (less the social security and Medicare taxes withheld) was paid to A’s estate on July 20, 2018.
Because X made the payment during the year of death, X must withhold social security and Medicare taxes on the $3,000 payment and must complete Form W-2 as follows:
- Box 1—$10,000.00 (does not include the $3,000 accrued wages and vacation pay paid after death)
- Box 2—$1,500.00
- Box 3—$13,000.00 (includes the $3,000 accrued wages and vacation pay paid after death)
- Box 4—Social security tax withheld on the amount in box 3
- Box 5—$13,000.00 (includes the $3,000 accrued wages and vacation pay paid after death)
- Box 6—Medicare tax withheld on the amount in box 5
Employer X also must complete Form 1099-MISC as follows:
- Boxes for recipient’s name, address, and TIN—the estate’s name, address, and TIN.
- Box 3—3000.00 (Even though amounts were withheld for social security and Medicare taxes, the gross amount is reported here.)
If Employer X made the payment after the year of death, the $3,000 would not be subject to social security and Medicare taxes and would not be shown on Form W-2. However, the employer would still file Form 1099-MISC.
Special Rules for Various Types of Services and Payments (IRS Circular E)
Remember that your state could have different regulations for paying wages for a deceased employee, so familiarize yourself with your state's specific regulations if applicable.
Most states have the same taxability of deceased employee wage payments, but make sure to confirm your specific state’s law of deceased employees.