How to Pay a Deceased Employee’s Wages

When an employee passes away, employers must manage their final compensation while navigating legal and tax regulations. This guide aims to clarify the procedures involved in handling a deceased employee’s final pay, from determining the correct recipient to fulfilling tax obligations.

Final Pay and Beneficiary Determination

Determining a deceased employee’s final pay involves identifying all compensation earned up to their date of death. This includes regular wages, commissions, bonuses, and accrued but unused paid time off (PTO) and vacation pay. Company policies or state laws may require payout of PTO and vacation. Expense reimbursements owed should also be processed.

Identifying the correct recipient is crucial. Employers must first check for designated beneficiaries for benefits like life insurance or retirement plans. If no specific beneficiary is designated for general wages, payment typically goes to the employee’s estate. The estate represents the deceased person’s assets and liabilities, managed by an executor or administrator.

For smaller amounts, state laws may allow direct payment to family members, such as a surviving spouse or children, without formal probate. This often involves a “small estate” affidavit, which simplifies asset transfer. Employers must review company policies, employment agreements, and applicable state laws to ensure final pay is directed to the legally recognized individual or entity.

Tax Treatment of Deceased Employee Compensation

Tax treatment of compensation paid to a deceased employee’s estate or beneficiaries varies by payment date. Wages paid within the calendar year of death are subject to Social Security and Medicare (FICA) taxes. These payments are not subject to federal income tax withholding by the employer. Such amounts are reported on a Form W-2 issued to the deceased employee.

Wages or other compensation paid in a calendar year after the employee’s death are not subject to FICA or Federal Unemployment Tax Act (FUTA) taxes. These payments, such as accrued vacation pay, are reported on Form 1099-MISC to the recipient. The amount is listed in Box 3, “Other Income,” for the estate or beneficiary.

Employers do not withhold federal income tax from wages paid after the year of death; the recipient is responsible for paying income tax on these amounts. The employer’s role is to accurately report the income to the Internal Revenue Service (IRS) and the recipient. If a tax refund is owed, Form 1310 may be used by the claimant to request it.

Documentation and Information Requirements

Before disbursing final payments, employers must gather documentation to verify the rightful recipient and ensure legal compliance. A certified death certificate is a primary document, serving as official proof of passing. This document confirms the date of death, crucial for determining the final pay period.

Further documentation helps identify the legal representative of the estate or designated beneficiaries. Employers should request copies of the deceased’s will or trust documents, if available, as these may name an executor or administrator. Letters of Administration or Letters Testamentary are court-issued documents that formally appoint the executor or administrator, granting them legal authority to act on the deceased’s behalf. These documents ensure payments are made to an authorized party.

For employer-sponsored benefits like life insurance or retirement plans, checking internal records for beneficiary designation forms is essential. These forms specify who should receive specific benefits. For smaller amounts, state laws permit a small estate affidavit. Obtaining accurate contact information for the executor, administrator, or designated beneficiary is also necessary.

Payment Disbursement and Reporting

Once documentation is gathered and the rightful recipient identified, the employer can proceed with payment disbursement. The method is typically a physical check, made out to “The Estate of [Employee’s Name]” or directly to the named beneficiary. Direct deposit may be permissible if the legal representative or beneficiary provides proper authorization and banking details.

State laws often dictate a timeline for final pay, ranging from immediately to a few weeks after the employee’s death or employer notification. Communication with the executor or beneficiary is important, providing a detailed breakdown of the payment. Maintaining records of the payment, including copies of the check and supporting documentation, is essential.

For tax reporting, employers must issue a final Form W-2 for wages paid within the year of death. This W-2 reflects wages and FICA taxes withheld, indicating the employee is deceased. For non-wage payments or wages paid after the year of death, a Form 1099-MISC is issued to the estate or beneficiary by January 31 of the following year. The 1099-MISC reports the income as “other income,” and the recipient is responsible for any income tax liability.