One of the most unpleasant situations someone might face as a business owner, supervisor, or HR representative is the unexpected death of an employee. It can be especially tough for smaller organizations or close-knit teams and dealing with the event can be difficult and stressful for all parties involved. To add to this, there are specific and often complicated and confusing rules that dictate how companies should handle final payments for the deceased employee.
Generally, wages owed and paid after an employee’s death are issued to the beneficiary or estate of the decedent. However, each situation may be different, and a company may be faced with different scenarios based on when they are notified of the employee’s passing. The IRS provides some guidelines on how to handle each situation for taxation and reporting:
Wages paid after the date of death, within the same calendar year
If payment for wages owed to a deceased employee is made in the same calendar year as the date of death, no federal income tax should be withheld from the payment. Applicable wages are still subject to FICA withholding. Wages should be included in box 3 (social security wages) and box 5 (medicare wages) of the employee’s W-2, but not reported in box 1. The wages should also be reported in box 3 (other income) of form 1099-MISC, which is issued to the beneficiary or estate.
Wages paid after the date of death, in a different calendar year
Sometimes, the company might not be notified right away or, due to other circumstances, may not be able to issue payment for wages owed in the same calendar year as the employee’s death. In these scenarios, no federal income tax or FICA should be withheld from payment, and the wages are not reported on form W-2. Again, wages are reported in box 3 of form 1099-MISC and issued to the beneficiary or estate of the decedent.
Wages paid prior to the date of death
Beneficiaries of deceased employees might discover that there are uncashed paychecks that need to be taken care of. These are relatively simple to deal with, and only require that the check be reissued to the beneficiary or the employee’s estate. Wages are reported as normal on the deceased employee’s form W-2, and no 1099-MISC is required.
It’s important to also refer to state or local legislation when handling deceased employee wages, as there may be additional rules and regulations that take precedence. In some cases, state laws may even dictate how much of the wages owed can be paid out. Dealing with an employee’s death can be difficult enough without the added stress of having to know how the various rules impact final wage payment. Working with a service provider can relieve some of that burden by giving you peace of mind in knowing the payments will be handled properly and in accordance with all applicable laws. Contact Valor Payroll Solutions today and rest assured, knowing our compliance experts can help ensure compliance when it comes to difficult and complex payroll issues.