Beyond its obvious emotional impact, an employee's death almost always leaves unfinished business for HR and payroll.
Follow these steps to help smooth the process when you're notified of an employee's death:
1. Ask the family for a death certificate (usually available about one to two weeks after the death) and whether a federal tax ID number exists for the estate. That may seem intrusive, but you should receive valid proof of death before cutting any final paycheck to a family member. Also, the tax ID number will be necessary if the final paycheck goes to the deceased person's estate, rather than a relative.
2. Begin COBRA notification process. An employee's death counts as a COBRA qualifying event for spouses and dependent children. If your organization must comply with COBRA, begin the paperwork necessary to notify your insurance carrier and survivors. Let survivors know how to file any life insurance claims as well.
3. Determine who should receive the employee's final wages. In some cases, the final paycheck will be paid directly to the estate administrator. In others, the check may go to the employee's spouse, children or other party. Check with your state's wage and labor department for your state's rules about paying final wages.
4. Record and report before-and-after-death payments carefully, if final wages are paid in the same year. Withhold FICA if the final paycheck is cut in the same year as the employee's death.
Use IRS Form 1099-MISC to report any payments made after the employee dies. If the final paycheck is sent to an individual (a spouse, for example), include that person's Social Security information on that form. If the final paycheck goes to the estate, list the estate Tax ID number.
At year-end, use IRS Form W-2 to report total compensation before death as well as any Medicare and Social Security deductions.
5. Don't withhold employment taxes if final wages are paid the following year. Any outstanding wages that aren't paid until the next calendar year aren't subject to federal income, Social Security or Medicare taxes. Report the total amount paid after death in box 5, other income, on Form 1099-MISC.
You won't need to file a W-2 at year-end if the final paycheck is issued in the next year. Check with your state's wage and labor department about state reporting and withholding procedures.
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