Processing future payments in the USA when an employee dies

01 October 2019

This article was featured in the October 2019 issue of the magazine. 

Sally Thomson CPP, director of payroll training for the American Payroll Association, discusses a situation that is likely to occur sometime 

An employee dies and accrued wages and vacation must be paid. How should these payments be processed? If you don’t have this documented in your payroll processes, consider creating a workflow now.

Do not assume the payment is to be issued to the estate of the employee. We must look to the state laws where the employee had resided to determine who is to receive the payment. Generally, payment is to be issued to an immediate family member. State laws and rules will also dictate the maximum amount payable before probate, any conditions to be met before payment is issued, and whether the payment is subject to state income tax withholding.

If payment is issued in the same year as the employee’s death, report the gross payment as social security and Medicare taxable wages in the employee’s Form W-2 in boxes 3 and 5 respectively. Social security and Medicare taxes must be withheld from the payment and reported in boxes 4 and 6 of the W-2 as well. Report the gross payment as federal income taxable wages in the recipient’s Form 1099-MISC in box 3. If the recipient does not provide their taxpayer identification number, backup withholding must occur and be reported in box 4 in the 1099-MISC.

Payroll will need to partner with accounts payable (AP) to determine whether the payment will be generated from the payroll system or the AP system. Regardless of which system processes the payment, the other system will need to memo post a transaction so that the Form W-2 and the 1099-MISC data will be accurate.

If payment is issued in a year following the year of the employee’s death, the reporting is simplified. The payment will be issued to the appropriate person, according to state law as mentioned above, and Form 1099-MISC will be generated for the payment. Nothing will be reported in the employee’s records, and no Form W-2 will be generated.

Should you deposit the funds into the employee’s bank account by direct deposit? Generally, this is not recommended. After a death, the employee’s bank account could be frozen. The direct deposit transaction would be returned to your organization. Or, the direct deposit might be accepted, but the family member may not have access to the bank account. It’s best to issue the payment to the appropriate person based on state laws. to have your process documented so you won’t be scrambling when a death occurs


What if the decedent had lived in a state without provisions regarding to whom the payment is to be issued? Your company should establish a policy. Consider issuing payments to the spouse or, if none, use the beneficiary form for your group-term life insurance policy or qualified retirement plan. Again, do not issue the payment to the estate unless there is an estate. And you’ll want to request a Form W-9, Request for taxpayer identification number and certification, before issuing the payment so that backup withholding is not required.

As this is a situation that occurs infrequently, it’s best to have your process documented so you won’t be scrambling when a death occurs. 

This article was printed in the February 2019 issue of PAYTECH, the APA’s membership publication

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