W-2 Issues with Deceased Employees

This is never an easy topic, but nonetheless something that needs to be reviewed every now and then.
If an employee dies during the year, you must report the accrued wages, vacation pay, and other compensation paid after the date of death. You may need to file both a W-2 and a 1099 for the deceased employee.
If you make payment in the same year that the employee died, you must withhold Social Security and Medicare taxes on the payment. You should report this payment on the employee’s W-2. Show the payment as Social Security wages (Box 3) and Medicare wages (Box 5) and Social Security and Medicare wages withheld (Box 4) and (Box 6). Do NOT show the payment as salaries and wages (Box 1).
Be sure to check with your state before you re-issue a deceased employee’s paycheck. There are differences among the states as to who can receive what kind of payments. For example, certain states allow the payment of vacation time to a 3rd party, but not sick time.
If you made a payment after the year of death, do not report it on the W-2. Additionally, you should withhold neither Social Security nor Medicare taxes.
If you pay the estate or a beneficiary, the IRS requires that you report the payment as Miscellaneous Income (Box 3) on the Form 1099-MISC. This is the rule regardless of whether you make the payment in the year of death or after the year of death.
In summary:

• Payments made in the year of death, but before the death occurred, are reported as run of the mill wages subject to all the normal W2 reporting.
• Payments made in the year of death, after the death occurred, are reported in W-2 Boxes 3 through 6. No FIT is withheld. What you would normally report in box 1 is instead reported in Box 3 of the 1099 MISC issued to the estate (or whomever received the check).
• Payments made after dearth are not subject to FICA or FIT withholding, nor are they reported on a W2. Instead, the amount is reported in Box 3 of the 1099 MISC issued to the estate (or whomever received the check).
• All bets are off for the states, they make their own rules. Check with your state taxing authority in order to properly report amounts paid on behalf of a deceased employee.

Until next post!

Leslie Vail