The loss of an employee due to death is a difficult time for a business. Not only is it hard to lose a friend and colleague, but the business is faced with the need to hire and train a replacement, a loss of productivity, and potentially complicated legal issues.
One of these issues involves how to properly handle any wages that are due to a deceased employee.
There are several factors that determine whether or not the payment of that employee's wages are taxable, how the payments and taxes withheld should be reported, and to whom the wages should be paid.
These factors include the following:
- Whether the payment is for an uncashed paycheck or for unpaid accrued wages, vacation pay, taxable fringe benefits, or other types of accrued compensation.
- Whether the payments are made in the same year the employee died or in a following year.
- Whether or not there are state laws limiting the amount that can be paid, to whom the wages can be paid, and whether or not state income taxes should be withheld.
Update: We created a checklist of wage details for deceased employees, along with how to provide workplace support. Download your copy of our offboarding guide with tips on handling wages for deceased employees.
Handling A Deceased Employee's Paychecks
If a paycheck has already been issued to an employee, but the employee dies before cashing it, a check has to be reissued for the same net amount of the original check, payable to the employee's beneficiary or personal representative.
The employer should also have the employee's personal representative sign a statement that the money being paid is for a deceased employee's uncashed paycheck. Since the final paycheck was already issued once, the necessary taxes have already been withheld, so the wages and taxes will be reported on the employee's Form W-2 at the end of the year.
Get the guide on how to pay deceased employees and offer workplace support.
One issue that must be addressed at this point is the definition of personal representative. Under federal law, an employee's personal representative is any person designated by an employee's will or determined by probate. If there is no will or if the employee's will or estate has not yet been probated, the check should be issued to the employee's estate.
Employers will want to check state law at this point, because it may designate that only certain individuals (such as a spouse, children, or parents) may be the employee's personal representative, and may limit how much may be paid directly to a personal representative.
Handling A Deceased Employee's Wages
Accrued Wages Paid the Same Year as the Employee's Death
Before a deceased employee's accrued wages can be paid, the employer should have the employee's personal representative or beneficiary complete Form W-9 in order to obtain the person's Social Security Number (SSN). Typically, if there is no personal representative, then the wages cannot be paid until the probate court has issued a tax identification number (TIN) for the employee's estate.
Wages paid in the year the employee died are subject to federal employment taxes (Social Security, Medicare, and FUTA). Therefore, the employer must withhold the Social Security and Medicare taxes from the employee's unpaid wages and deposit these taxes and the employer's share. [IRS Publication 15, pp. 23, 36.] At the end of the year the wages will be included on Form 940, subject to the FUTA tax.
Pay outstanding wages first. Afterwards, you'll have to handle other necessary paperwork.
The employer will report the accrued wages and the federal employment taxes withheld in Boxes 3-6 on the employee's Form W-2. The gross amount of the unpaid wages should not be included in Box 1. [IRS Revenue Ruling 86-109.] The gross amount paid should be reported in Box 3 (Other Income) of Form 1099-MISC in the name and TIN of the beneficiary, personal representative, or the employee's estate. [Instructions for Form 1099-MISC, pp. 2-3.]
Wages Paid in a Year After the Employee's Death
The payment of accrued wages may not be paid until a later year because of delays in probating the employee's estate. When this happens, IRS Revenue Ruling 86-109 states that “these payments are not considered wages for purposes of the collection of income tax at source,” and the payments are not subject to federal employment taxes. These amounts will not be reported on a Form W-2.
Therefore, the employer will report the gross amount paid in Box 3 (Other Income) of Form 1099-MISC in the name and TIN of the beneficiary, personal representative, or the employee's estate.
A Practical Example
In order to clarify some of the issues involved, here’s an example that’s partially based on the example presented on page 3 of the Instructions for Form 1099-MISC.
John Doe, who worked for XYZ Corporation, died June 8, 2016. He had received a paycheck with a net pay of $450 on Friday, June 6, 2016, which he had not yet cashed. He was still due accrued vacation pay of $2,000, a week's wages of $250, and a production bonus of $800 for the month of May. John had already been paid gross wages totaling $15,000 before his death, including the uncashed final paycheck.
John's wife Jane can collect John's uncashed paycheck, so XYZ reissues a check in the amount of $450 payable to Jane Doe.
John's will is probated September 17, 2016, and XYZ issues a check in the amount of $2,816.67 to Jane Doe on September 24, 2016. Since the payment is made in the same year John died, the payment is subject to federal employment taxes. The gross amount due is $3,050, so XYZ Corporation deducts $189.10 for Social Security tax and $44.23 for Medicare tax.
John's Form W-2 will be completed as follows:
- Box 1 - $15,000.00 (Wages)
- Box 3 - $18,050.00 (Social Security wages which includes the total wages ($15,000) plus accrued vacation pay ($2,000) plus the $250 week's wages plus the production bonus ($800))
- Box 4 - $1,119.10 (Social Security tax - $930 on $15,000 plus $189.10 on $3,050)
- Box 5 - $18,050.00 (Medicare wages, which is the same as Social Security wages here)
- Box 6 - $261.73 (Medicare tax - $217.50 on $15,000 plus $44.23 on $3,050)
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$3,050 will be reported in Box 3 of Form 1099-MISC under Jane Doe's SSN.
Many are unsure of what to do when an employee dies, but by following the rules outlined above, an employer can help the deceased employee's beneficiaries receive everything they are due, and properly report the payments.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.