You may think your staff will always be with you, but today individuals are working longer and retirees are going back into the workforce. You may need to know how to handle the final wages of an employee efficiently and correctly.
In the event of an employee’s death, obtain the estate’s federal tax ID and the names, addresses, and social security numbers of the beneficiaries as soon as possible. If you use a payroll service, give it this information right away.
The year of payment governs whether payroll taxes apply
Although wages paid to the beneficiary or estate are subject to federal and state income tax, the year you pay them determines whether they are subject to additional payroll taxes. Wages paid in the calendar year of death are subject to social security, Medicare, and FUTA and SUTA, but not income tax withholding. Wages paid in a later year are not subject to income tax withholding, social security, Medicare, FUTA, or SUTA.
Report wages paid before death on Form W-2. If any pre-death payroll checks were not cashed, you must issue a new check to the estate or beneficiary for the same net pay, and include these wages and withholding on the employee’s Form W-2.
Report wages paid after death in the year of death on the employee’s Form W-2 as social security wages in box 3, if applicable, and Medicare wages in box 5, with the taxes withheld in box 4 for social security, if applicable, and box 5 for Medicare. However, do not include these amounts as taxable wages in box 1 or box 16 of Form W-2. Instead, report them in the name of the beneficiary or estate in box 3 of Form 1099-MISC.
Report wages paid after the year of death on Form 1099-MISC. As mentioned above, they are not subject to payroll taxes.
Check for special state requirements or provisions
State requirements may differ, and some can be very detailed. For example, Wisconsin notes the following:
• Upon demand by the deceased employee’s spouse, qualified domestic partner, children, or other dependent living with the employee at the time of death, the employer is required to pay the full amount of wages due. Otherwise, not less than five days after the death of an employee and before the filing of a petition or application for administration of the decedent’s estate, the employer may make payments to these individuals, giving preference in the order listed.
• If none of these individuals survives, the employer may pay creditors (according to a certain required order of preference)
the amounts necessary to satisfy the debts of the decedent.
Dealing with an after-death situation can be difficult in many ways. Knowing how to correctly report these wages and benefits may help alleviate some of the stress. Please contact us if you need more information.