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.

The decedent’s return must be filed by April 15. If additional money is owed, that amount should be paid when taxes are filed. The IRS could impose a lien on the property of the deceased if owed taxes are unpaid. Conversely, if there is a tax refund due, it can be claimed using the 
Form 1310.

Paying an Employee After Death (Subsequent Year)

What happens when an employee is owed wages in a new year after they are already deceased? When this happens, the payments are not taxable. Payments of this nature are exempt from federal, FICA, and FUTA taxes. These payments should then be recorded on a Form 1099-MISC and reflected in box 3. The 1099-MISC should be made out to the name of the beneficiary or estate. A taxpayer identification number (TIN) number should be used in place of the deceased’s Social Security number.

Separately, death benefits from non-qualified deferred compensation, like a 401(k), are reported on Form 1099-MISC in box 3 when paid to the estate or beneficiary of a deceased employee.

Uncashed Paper Checks

What happens when an employee passes before they can cash their last 
paper check? Even with direct deposit taking over, this is still a situation you might find yourself in.

In cases like these, the employer would want to stop payment on the original check. Then, they would reissue the check to the employee’s beneficiary or estate for the same net amount. The reason this reissue remains the same is because income and employment taxes were properly withheld at the time it was created. Those taxes and wages would then still be reflected on the deceased’s Form W-2. 

Note that you should check state law before reissuing the check. Your jurisdiction may have requirements pertaining to how much can be paid, and who qualifies as beneficiary.

There are far more important items to focus on when an employee passes. But even in death, the IRS still has to collect its dues. By using the guidance provided above, you’ll have the ability to ensure that any owed funds are properly distributed and that you’re doing right by the dearly departed.

Topics: Payroll, Taxes

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