The death of a loved one is a challenging time for a family. Not surprisingly, it’s also a challenging time for an employer. There are several considerations when handling the wages and benefits of a deceased employee.
Considerations regarding wages and benefits of a deceased employee
Wage payment
In general, state laws will dictate how wages are processed for a deceased employee. State laws may have provisions regarding: (1) the maximum amount payable; (2) to whom wages may be payable; and (3) conditions of payment. Employers should check the applicable state labor agency for specific guidance. See the U.S. Department of Labor’s list of state labor agencies.
Additionally, vacation or other accrued paid time off (PTO) may need to be paid out according to state law requirements. When the state law is silent, an employer’s policy would apply.
Finally, if the employee had an active garnishment, the creditor must be notified of the death of the employee.
Federal withholding and reporting
Employers should submit a Form W-9 (Request for Taxpayer Identification Number and Certification) to obtain accurate information for the beneficiary or estate to be used on Form 1099-MISC where payments related to a deceased employee must be reported.
Handling wages paid after an employee’s death in the same year
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Withholding: Federal income tax (FIT) is not withheld; however, FICA (Social Security and Medicare taxes) must be withheld.
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FUTA: Subject to FUTA (Federal Unemployment Taxes) when $7,000 wage cap has not yet been met.
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W-2 reporting: A W-2 must be issued in the employee’s name. However, no wages are reported in Box 1. Social Security (SS) Wages (Box 3) and Medicare Wages (Box 5) must be reported. Withhold taxes for SS and Medicare Wages must be reported in Boxes 4 and 6.
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Beneficiary/Estate 1099-MISC reporting: Wages should be reported in Box 3 (Other Income).
Handling wages paid after an employee’s death in the tax year after the death
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Withholding: FIT and FICA are not withheld.
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FUTA: Exempt from FUTA taxes.
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W-2 reporting: No W-2 should be issued in the employee’s name.
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Beneficiary/Estate 1099-MISC reporting: Wages should be reported in Box 3 (Other Income).
Handling wages paid to an employee prior to employee’s death but must be reissued to beneficiary/estate because check has not been cashed
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Withholding: Both FIT and FICA tax must be withheld.
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FUTA: Subject to FUTA when $7,000 wage cap has not yet been met.
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W-2 reporting: A W-2 must be issued in the employee’s name. Wages must be in reported in Box 1, Box3 (SS Wages), and Box 5 (Medicare Wages). Withheld taxes are reported in Boxes 2 (FIT), 4 (SS tax), and 6 (Medicare tax).
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Beneficiary/Estate 1099-MISC reporting: Not applicable.
🚩 Payments that may require reissues include wages paid by direct deposit. If possible, recall the direct deposit and reissue the wages to the beneficiary or estate.
For additional information, see General Instructions for Forms W-2 and W-3 and General Instructions for Certain Information Returns.
State withholding
State withholding requirements will vary from state to state. Note that the following states do not have a state income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
See list of state tax agencies available on the IRS website.
Death and other benefits
Employer-sponsored death benefits are included in income for FIT withholding purposes. However, payments or series of payments made under a plan or system (e.g., payments from an incentive compensation plan or cash dividends) to employees or their dependents because of death or retirement for disability are exempt from FICA and FUTA. Death benefits from qualified and nonqualified deferred compensation plans paid to the estate or beneficiary of a deceased employee are reportable on Form 1099-R, not Form 1099-MISC. Any payment made by an employer to a survivor or estate of a former employee after the calendar year in which the employee died is exempt from FICA. Such benefits are not reported on Form 1099-R and are to be reported on Form 1099-MISC.
COBRA coverage and notice
The Consolidated Omnibus Budget Reconciliation Act of ’85 (COBRA) allows certain former employees, retirees, spouses, former spouses and dependent children the right to the temporary continuation of their health coverage at group rates. The COBRA continuation coverage provisions do not apply to group health plans sponsored by employers with fewer than 20 employees.
The death of an employee is considered a “qualifying event” that triggers the need to offer COBRA coverage to the employee’s qualified beneficiaries. Employers must notify the plan administrator of an employee’s death within 30 days of the event. The election notice must be sent to the employee’s qualified beneficiaries within 14 days after being notified of the employee’s death.
The Final Word
Employers can play a key role during a difficult and sensitive time for an employee’s family. Understanding and fulfilling the many employer responsibilities for a deceased employee will help their family meet financial obligations and offer peace of mind.
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Try Checkpoint Edge and get instant access to numerous resources for handling wages to deceased employees. Check out the Quick Reference Chart ¶17,060 which summarizes state law provisions that govern the wage payment for deceased employees. For federal withholding, see Payroll Guide ¶3820, for W-2 reporting, see Payroll Guide ¶4260, for 1099-MISC reporting, see Payroll Guide ¶4268. For the federal tax treatment of death benefits, see Payroll Guide ¶3210.
