Death and Taxes: Processing a Deceased Employee’s Final Check

We’ve all heard the old saying about death and taxes. But going further, what are the tax implications of death?

There’s no denying the emotional toll when we lose a loved one or colleague. But even in death, payroll still needs to be processed. We'll break down the common scenarios that might occur when an employee passes. 

Paying an Employee After Death (Same Year)

In this scenario, the unthinkable happens mid-pay period. Although the employee will never use these funds, they still count as earned wages. This even applies to vacation time, as anything accrued is considered “earned” by the employee.

In this event, an employer would pay the wages to the deceased employee’s estate or legal representative. The payment is not subject to federal income tax. That said, it's still subject to Social Security, Medicare and FUTA taxes. The applicable wages are then properly recorded on the employee’s Form W-2 in boxes 3 through 6.

Besides just inheriting a loved one’s collection of antiques, the bereaved might also inherit the task of filing their final Form W-2. If there is no estate or legal representative, a survivor of the deceased can file the return. If the survivor is a spouse, they may file a joint return for the year of death, claiming the full standard deduction and using the joint filing rates.