What to Do With Deceased Employee Wages

Death is not easy for anyone. But, if an employee suddenly dies, your small business can be hit hard. Employees might want to use bereavement leave. You also need to keep your business’s administrative tasks going. When an employee dies, your payroll responsibilities don’t die, too. You will need to tie up any loose ends that involve the deceased employee’s wages and benefits.

Read on to learn what you should do with deceased employee wages and benefits.

Deceased employee wages

How you handle deceased employee wages depends on when you pay the employee’s final paycheck. Your options vary slightly depending on when you distribute the deceased employee wages:

• Before death
• After death
• The same year as the death
• The year after the death

Final paycheck issued before death

You issued the employee a paycheck shortly before they died, and the check remains uncashed. What do you do?

First, cancel the check. Then, issue a new check to the employee’s beneficiary or estate. You will still withhold any payroll taxes that the original paycheck was subject to.

You should report the wages and payroll taxes on the deceased employee’s W-2 Form with the year’s wages and payroll tax withholdings.

Final paycheck issued after death

What do you do if an employee suddenly dies, and you still owe them wages?

Issue the final payment to the employee’s beneficiary or estate. Have the beneficiary or estate representative complete Form W-9 so you have their information. Keep in mind that it could take a while to receive the completed Form W-9 if the estate needs to obtain an employer identification number (EIN).

Once you receive the beneficiary’s or estate’s information, make the final paycheck out to the beneficiary or estate. You must report the gross amount on Form 1099-MISC in box 3. Use the information you received on Form W-9 to fill out IRS Form 1099-MISC.

Final paycheck issued in the same year

If you pay deceased employee wages in the same calendar year that the employee died, you will not deduct federal income tax withholding (FITW) from the wages. You will, however, withhold FICA and FUTA taxes. You might also have to withhold state taxes but check with your state laws to be sure.

On the employee’s Form W-2, add the final paycheck to Social Security wages (box 3) and to Medicare wages and tips (box 5). You will not add the final wages to box 1. Add the Social Security taxes withheld to box 4 and the Medicare taxes withheld to box 6.

Remember, you need to fill out a Form 1099-MISC and send it to the beneficiary or estate.

Final paycheck issued in the next year

If you pay the final paycheck in the calendar year after the employee died, you will not withhold FITW, FICA, or FUTA. You might still have to withhold state taxes, but this will depend on your state’s laws.

When you make the final payment in the year after the employee died, you will not report the wages on Form W-2. Despite this, you will send Form 1099-MISC to the beneficiary or estate.

Deceased employee benefits

You will need to treat all unused vacation, sick, and PTO leave according to your state’s laws. If your state does not have any laws regarding a deceased employee’s unused leave, follow your business’s leave policy.

If you pay out an employee’s unused leave, you will handle those wages as you would for a payment issued after death.

Regarding other types of fringe benefits (e.g., life insurance, health insurance, retirement plans, etc.), you will need to determine who is the beneficiary. The employee most likely designated a beneficiary when they first filled out paperwork for the benefits.

If possible, meet and talk to beneficiaries about what they are eligible to receive. Let them know what they must do to receive the benefits.

Find out how many death certificate copies you or the beneficiaries will need. You will often need a death certificate to process final benefits paperwork.

If you offer health insurance, you will need to terminate the deceased employee’s policy. If the health insurance policy covers a spouse or dependents, notify them that their coverage will end.  Let them know their options. Beneficiaries might be eligible for a COBRA plan health insurance extension—a way to temporarily keep their health coverage.

Example

An employee dies on May 10, 2016. You previously paid the employee $16,000 in wages, from which you deducted $2,000 for FITW. At the time of death, you owe the employee $1,500 in wages and $500 in accrued vacation pay. You make a payment to the employee’s estate on May 27, 2016.

Because you paid the wages after death but in the same calendar year, you will not deduct FITW from the $2,000 total owed wages. You will deduct Social Security tax and Medicare tax at their current rates (6.2% and 1.45% respectively).

You will complete the deceased employee’s Form W-2 as follows:

• box a: Employee’s SSN
• box e: Employee’s name
• box f: Employee’s address
• box 1: 16000.00 (This is the total wages you paid the employee prior to death. This amount will not include the $2,000 paid after death.)
• box 2: 2000.00 (the total FITW taken from previous wages)
• box 3: 18000.00 (the total of previous wages, owed wages, and vacation pay)
• box 4: 1116.00 (6.2% of the amount in box 3)
• box 5: 18000.00 (the total of previous wages, owed wages, and vacation pay)
• box 6: 261.00 (1.45% of the amount in box 5)

You will also fill out Form 1099-MISC for the payment you gave to the beneficiary or estate.

• Use the beneficiary or estate’s name, address, and identification number on the form.
• box 3: 2000.00 (Report the gross payment, even though FICA taxes were withheld.)

You will also need to talk to the beneficiaries of the employee’s benefits plans. Let them know what they are eligible to receive and what you need from them to cancel the plans.

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This article has been updated from its original publication date of February 26, 2016.

This is not intended as legal advice; for more information, please click here.