Question: We are a public employer. Since employees haven’t had pay raises in more than four years, we will soon be making cash distributions to them. Employees’ survivors will get separate distributions. Are these distributions taxable and how do we report payments made to survivors?
Answer: The general rule is that regardless of what you call a payment—a distribution or a bonus—a payment made in the course of employment is fully taxable and reportable as wages.
Distributions made to survivors during the year the employee died are wages for FICA purposes only. The wages are reported in Boxes 3 and 5; the taxes withheld are reported in Boxes 4 and 6. Distributions made after the calendar year of death, aren’t subject to FICA taxes. Regardless of the year during which the employee died, distributions totaling at least $600 must also be reported to the deceased employee’s estate or beneficiary on Form 1099-MISC.