General Provisions
Payment of Final Wages to the Estates of Deceased Employees

Background

Customarily, state agencies and institutions of higher education issue final payments of compensation for a deceased state employee to an estate of the deceased. However, in rare circumstances these final payments may be issued to an authorized spouse. A spouse is authorized only if:

• A sworn written statement that is notarized (an affidavit) is furnished to the paying agency.
  – and –
• The affidavit states:
  • The person who swears under oath (the affiant) is the employee’s surviving spouse.
    – and –
  • No person has qualified as an executor of the will or is an administrator of the employee’s estate.

The transaction is made in good faith, and agencies are not required to determine if an affidavit is truthful. The person who accepts payment must answer to any person having prior right to the disbursement.

As in any legal matter, payroll officers should consult with their agency’s general counsel to resolve legal questions related to disposition of final payments of compensation for deceased state employees.

Special Tax Considerations

If an employee dies after receiving a paycheck but before cashing it, the agency should reissue the payment to the employee’s estate for the same net amount, since income taxes were properly withheld. The wages and amounts withheld must be reported on the deceased employee’s Form W-2.

Wages paid to a deceased employee’s estate after the employee dies but in the year of death are not subject to federal income tax (FIT) withholding. They are, however, subject to Social Security and Medicare withholding under the Federal Insurance Contributions Act (FICA). Therefore, the employer must report the Social Security and Medicare wages and the amounts withheld on the deceased employee’s Form W-2. The amount of taxable income should be reported on Form 1099-MISC in the name of the payment’s beneficiary.

Wages paid to a deceased employee’s estate after the year of the employee’s death are not subject to FIT, Social Security or Medicare withholding and should only be reported on Form 1099-MISC in the name of the payment’s beneficiary.

Sources

Texas Estates Code Section 453.004; IRS Publication 15, Employee’s Tax Guide; IRS Publication 15-a, Employer’s Supplemental Tax Guide.