In the last Ketel Thorstenson, LLP newsletter, Denise Webster, CPA, PFS and Managing Partner wrote about the income tax filing requirements when someone passes away. What some employers might not know is that there are also special filing requirements in regards to the final paycheck of an employee who passes away during their employment. The taxability of their final wages depends on the date of death and the date of the last payroll check.
Wages that are paid after a death include all time worked, plus any accrued vacation time owed to the employee if that is the company’s policy. Since the Fair Labor Standards Act (FLSA) does not require employers to pay vacation, sick, holiday or other pay for time not actually worked, be sure to follow your company’s handbook and employment contracts when issuing a final paycheck to the deceased.
If the final paycheck that is owed to the deceased employee will be in the same year as the employee’s death (i.e.> if they passed away on November 30, 2016, but the final payroll check will be dated December 15, 2016) those paycheck wages are exempt from Federal Withholding, but are taxable for Social Security, Medicare and Federal Unemployment.
If the final paycheck that is owed to the deceased employee will be in the year following the date of death (i.e.> if they passed on December 31, 2016, but the final payroll check will be dated January 15, 2017) those paycheck wages are exempt from Federal Withholding, Social Security, Medicare and Federal Unemployment. If accounting software is used, it is easiest to prepare a vendor check instead of a payroll check. In this instance there will not be a W-2 issued.
In both instances, State Unemployment varies and the state guidelines should be referenced for proper reporting.
In addition, the IRS requires a 1099 to be issued to the estate or trust of the deceased employee. According to the IRS, “Whether the payment is made in the year of death or after the year of death, you also must report it in box 3 of Form 1099-MISC, Miscellaneous Income, for the payment to the estate or beneficiary.” Therefore, if the final paycheck date is in the year of death, the employee will receive a W-2 for the whole year’s wages and the estate will receive a 1099 for the portion of wages paid on the last paycheck. If the paycheck date is in the following year, only a 1099 to the estate is needed. In Denise Webster’s article mentioned earlier, she explains that an estate is set-up after the death if the decedent’s assets are not titled in a trust.
As stated above, there are some unique reporting items when a tragedy like this happens. To report the payroll taxes correctly on the final payroll and the W-2, you may have to set up a new payroll item. Please don’t hesitate to contact the KTLLP accounting services department for assistance.
|Final Payroll Check Date||Federal Withholding||Social Security & Medicare||Federal Unemployment||State Unemployment||W-2 Reporting||1099 MISC|
|Same year as employee’s death||Exempt||Taxable||Taxable||Varies by State||Yes||Box 3|
|Year after employee’s death||Exempt||Exempt||Exempt||Varies by State||No||Box 3|