How to Issue a 1099 for Deceased Employee Wages
Paying final wages for a deceased employee involves unique tax rules. Learn how the timing of the payment determines the correct tax form and withholding.
When an employee passes away, an employer’s responsibility for their final compensation continues. These final payments can include accrued salary, unused vacation pay, and other compensation. The tax reporting for these payments is determined by the timing of the payment relative to the employee’s year of death. The process ensures proper credit for social security and medicare contributions and that the income is correctly reported for the recipient.
Reporting Payments in the Year of Death
When an employer disburses an employee’s final wages in the same calendar year as their death, the payments are subject to Social Security and Medicare (FICA) taxes, as well as federal unemployment (FUTA) taxes. For FICA, the employer must withhold the employee’s share from the payment and pay the corresponding employer portion. FUTA tax, however, is an expense paid solely by the employer and is not withheld from the payment.
These payments are not subject to federal income tax withholding. When preparing the deceased employee’s Form W-2, the wages should not be included in Box 1, “Wages, tips, other compensation.” Instead, the payment amount is reported in Box 3, “Social Security wages,” and Box 5, “Medicare wages and tips.” The corresponding FICA taxes withheld are then reported in Box 4, “Social Security tax withheld,” and Box 6, “Medicare tax withheld.”
Even though the payment is made to a beneficiary or the estate, it is still considered the employee’s earnings for these specific social insurance programs. The Form W-2 is issued in the name of the deceased employee, using their Social Security Number, just as it would have been if they were still alive.
The payment itself, while reported on the W-2 for FICA purposes, is also considered income to the recipient, which is the estate or a named beneficiary. Therefore, the employer has a dual reporting requirement. In addition to the modified Form W-2, the payment must also be reported on Form 1099-MISC. This ensures that the income is properly attributed to the party who received it for income tax purposes.
Reporting Payments After the Year of Death
If the final wage payment to a deceased employee is made in a calendar year following the year of their death, the tax reporting rules change substantially. These payments are not considered wages for employment tax purposes. This means they are not subject to FICA (Social Security and Medicare) taxes, FUTA taxes, or federal income tax withholding.
For these post-year-of-death payments, the employer must not use Form W-2. Instead, the entire amount is reported on Form 1099-MISC, “Miscellaneous Information.” Specifically, the gross payment amount is entered in Box 3, “Other income.”
The recipient of the Form 1099-MISC is the individual or entity that received the funds. This could be the deceased employee’s estate or a designated beneficiary. The form must be issued under the recipient’s name and their corresponding Taxpayer Identification Number (TIN).
No tax withholding calculations are necessary. The responsibility for paying income tax on these funds shifts entirely to the recipient—the estate or beneficiary. They must include the amount from Box 3 of the Form 1099-MISC as income on their own tax return for the year they receive the payment.
Identifying the Payee and Obtaining Tax Information
Before any payment can be issued or tax form prepared, the employer must first identify the correct recipient of the final wages. This recipient is determined by company policy, beneficiary designations on file, or state law. The payment is generally made to either a designated beneficiary or to the deceased employee’s estate.
Once the payee is identified, the employer must obtain their correct Taxpayer Identification Number (TIN). The standard method for this is to request that the recipient complete and return Form W-9, “Request for Taxpayer Identification Number and Certification.” This form formally documents the payee’s name and TIN.
The type of TIN will depend on who the payee is. If the payment is made to an individual beneficiary, their TIN will be their Social Security Number (SSN). If the payment is made to the deceased’s estate, the estate will need to obtain its own Employer Identification Number (EIN) from the IRS.
Having the correct name and TIN is necessary for accurately completing either the Form W-2 or the Form 1099-MISC. An incorrect TIN can lead to IRS notices and potential penalties for the employer.