In this installment of our Payroll Brass Tax podcast series, Mike Mahoney (shareholder, Morristown/New York) and Stephen Kenney (associate, Dallas) discuss the many issues that come into play when determining how to make the final wage payment for a deceased employee. They outline a three-step process for handling these payments: 1) review state and federal laws to determine who is entitled to receive the final paycheck, how much can be paid, and the timing of the payment; 2) obtain the necessary documentation to release the final wages and verify the legal right of the beneficiary or estate representative to receive the payment; and 3) communicate clearly with beneficiaries or estate representatives to ensure they understand the process and requirements for receiving the final wage payment.
Transcript
Announcer: Welcome to the Ogletree Deakins podcast, where we provide listeners with brief discussions about important workplace legal issues. Our podcasts are for informational purposes only and should not be construed as legal advice. You can subscribe through your favorite podcast service. Please consider rating this podcast so we can get your feedback and improve our programs. Please enjoy the podcast.
Mike Mahoney: Welcome to the third episode of Payroll Brass Tax. Today, we're going to be talking about payments to deceased employees. I'm your host, Mike Mahoney, a shareholder in Ogletree's Morristown, New Jersey, office. Joining me today is Stephen Kenney, an associate in our Dallas, Texas, office. With that, let's jump right into it.
Stephen, what happens to the wages of a deceased employee?
Stephen Kenney: Well, Mike, naturally, there are one of two things that could happen. The wages could have already been paid before the employer was notified that the employee passed away. In that case, it's possible that the wages are already in the decedent's bank account or there's a paper check out there in the name of the deceased. Alternatively, there may be a representative that appears, a representative of the deceased employee, and they approach the employer and request that the unpaid wages be paid out.
Mike Mahoney: Thanks, Stephen. Who is entitled to receive the final wages of a deceased employee?
Stephen Kenney: This is really going to be a state law issue. State law governs the entitlement to the final wages of a deceased employee. Of course, since we have 50 different states, you have quite a number of different approaches. For instance, the various states may say that the final wages could be paid to the guardian of a minor child, a relative of the deceased, a spouse of the deceased, or simply to the estate of the deceased. They could even be silent on the matter altogether.
Mike Mahoney: That's really interesting. Can an employer pay the final wages directly to a surviving spouse or family member?
Stephen Kenney: Yes, but naturally, only if state law specifically allows for it. There is no default provision that allows for a universal payment to be made to a surviving spouse or family member, that for instance, entitles them to collect the unpaid wages of a deceased relative. Instead, specific state law is going to dictate that a surviving spouse may get it, may receive the final paycheck, or a surviving family member, or a child of the deceased. Now, they may also require, in addition to just direct payment to the spouse or family member, that that spouse or family member also needs to sign an affidavit that attests to his or her entitlement to the unpaid wages.
Mike Mahoney: If an employer has an employee who passes away unfortunately, how should an employer handle that final paycheck of the deceased employee?
Stephen Kenney: The first thing that an employer should do in this unfortunate circumstance is they should really stop and wait. That is stopping and waiting for a representative of the deceased employee to come forward before issuing the final paycheck of the deceased employee. It is possible that the person entitled to the wages does not have access to a bank account of the deceased employee. For instance, if the employer makes a direct deposit of the final paycheck into the employee's bank account, then the employer could very well end up involving itself in the affairs of the deceased employee's estate, which is not where an employer wants to be. If no representative comes forward, then ultimately the final paycheck may escheat to the state as unclaimed property and the employer can handle that accordingly.
Mike Mahoney: What type of documentation should an employer request in order to be able to release the final wages to the deceased employee's appropriate payee?
Stephen Kenney: Typically, at a minimum, employers will require a death certificate and proof of the beneficiary's legal right to receive the payment, such as letters of administration or a probate court order. Alternatively, a small estate affidavit may suffice if the estate's representative attests that the deceased employee's estate does not exceed certain statutory thresholds for small estates. For instance, if the total value of the estate, usually excluding things such as a residence of the employee, doesn't exceed for instance $75,000, then there's no need to go through the probate process. And instead, the small estate affidavit can suffice as proof that this individual representative is entitled to the final wage payment.
In sum, employers should obtain a death certificate and any legal documents providing the beneficiary's right to receive the payment, such as letters of administration. This documentation is necessary for accurate tax reporting and compliance.
Mike Mahoney: This sounds far more complex than simply cutting a check or making the final payment to the employee's direct deposit account. Maybe you can just sum up, what are the steps that an employer should take to ensure compliance with all of these various requirements that you've mentioned regarding payments to a deceased employee?
Stephen Kenney: Yeah, happy to do so. It's really a three-step procedure that employers should think through as they're considering issuing the final wage. First, they should review the state and federal laws regarding federal wage payments. This is going to be very state-specific, as I previously mentioned. When reviewing those state laws, you're trying to figure out who can be paid this final paycheck, how much of this final paycheck can they be paid, and when can they be paid.
After you determine that through your state law analysis, you have to ensure that proper documentation is obtained. This, for instance, is that small estate affidavit, or letters of administration, or testamentary from a probate court.
Then, third, you have to be able to communicate clearly with the deceased employee's beneficiaries or estate representatives. They may not be aware of the final wage payment laws in the state. It really might take some time and consideration as you work through the process with the beneficiary or the estate representative.
Mike Mahoney: Really appreciate that summary. I think just a few more questions from me. When the employer makes the final wage payment after determining the appropriate payee, how much can be paid, where to pay it, are those final wages of a deceased employee subject to federal income tax withholding?
Stephen Kenney: Yes, those wages may very well be subject to federal income tax withholding, but it depends on when the wages are paid in relation to the employee's death. If the employee dies before cashing the paycheck, the employer can reissue the check to the employee's personal representative for the same net amount, so after tax withholding amount, since income taxes were properly withheld. In this case, the wages are subject to federal income tax withholding because they have already been subjected to federal income tax withholding. Thus, the wages and amounts withheld must also be reported on the deceased employee's Form W-2.
If the wages happen to be paid after the employee dies, but in the same year of death, then they are not subject to federal income tax withholding. The wages are not reported for a Form W-2 for income tax purposes, but instead reported on a Form 1099 miscellaneous because they are paid after the employee's death. The Form 1099 is issued in the name of the beneficiary of the final wages, and then it is ultimately up to the beneficiary to handle the income tax consequences of that final payment.
Lastly, we can consider if the wages are paid after the year of death. Then, they are also not subject to federal income tax withholding. They are, again, reported on a Form 1099 miscellaneous in the name of the beneficiary of the payment. That beneficiary handles the income tax consequences of this final wage payment.
Mike Mahoney: Really appreciate that insight. What about Social Security and Medicare taxes? Are those taxes withheld from the final wage payments of a deceased employee?
Stephen Kenney: Similarly to income tax withholding, the final wages may be subject to Social Security and Medicare tax depending upon when the wages are paid in relation to the employee's death. If the employee dies before cashing the paycheck, as we mentioned before, the employer may reissue the check to the employee's personal representative in the same manner as I mentioned for income tax withholding. Then, of course, in the same manner, the wages presumably were already subjected to Social Security and Medicare tax withholding at the time the paycheck was first issued, so it's a non-issue since those wages were already subjected to Social Security and Medicare. No need to take any further action, you can just issue the net paycheck.
However, if the wages are paid after the employee dies and were still in the same year of death, then, unlike income tax withholding, they are subject to Social Security, Medicare, and federal unemployment taxes. Therefore, the employer reports the Social Security and Medicare wages and the amounts withheld on the deceased employee's Form W-2, and those go in boxes three through six of the W-2, even though the employer is issuing a Form 1099 in the name of the beneficiary of the final wages to account for potential income taxes. So, you have a bit of a split decision here. Social Security and Medicare being reported on the Form W-2, and the potential income tax is going to be handled through the 1099 that reports the payment in the name of the beneficiary or the estate.
Lastly, if wages are paid after the year of death, then they are not subject to Social Security, Medicare, or federal unemployment taxes and are only reported on a Form 1099 that is issued to the beneficiary of the payment.
Mike Mahoney: Are there any special tax forms that an employer should obtain from the beneficiary of the deceased employee's final wage payment?
Stephen Kenney: Yes. An employer should request a Form W-9 from the representative of the estate or from the beneficiary. The estate is a distinct and separate entity for tax purposes; therefore, it has its own taxpayer identification number. Thus, an employer needs to send a Form W-9 to the representative of the estate to ensure that the employer properly reports and records the payment to the estate for tax purposes. Alternatively, if the payment is not being made to an estate, but if it is being made to, for instance, an individual beneficiary, the same principle applies. The employer needs to send a Form W-9 to that individual beneficiary so that the employer can properly report and record the payment to the beneficiary for tax purposes.
Mike Mahoney: Thanks, Stephen, really insightful. Thank you, all, for joining us on this month's installment of Payroll Brass Tax. We hope you'll join us next month, where we will bring you another topic that is dealing with frequently asked questions in our employment tax group. Stay well.
Announcer: Thank you for joining us on the Ogletree Deakins podcast. You can subscribe to our podcasts on Apple Podcasts or through your favorite podcast service. Please consider rating and reviewing so that we may continue to provide the content that covers your needs. And remember, the information in this podcast is for informational purposes only and is not to be construed as legal advice.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
