W-2 beyond death

[Golden Rocket]

The White Oleander post below gives rise to a related question...

This has probably been answered before, or at least widely taught, but I've missed the train anyway so I'll ask.

Bubba, healthy and gainfully employed, suddenly dies on Dec 29, 2011. His pay period ended on Dec 27th, and on January 3, 2012, his employer delivers his final paycheck. His final paycheck contains a substantial amount of accrued vacation and other assorted benefits.

FEDDUKE prepares his 2011 tax return, thought to be his final return. But during January of 2013, his family brings in a W-2 for 2012 for $18,000.

1. Is the $18,000 reported on a 1040 or a 1041?
2. Is the $18,000 reported for 2011 or 2012?

[Burke]

The White Oleander post below gives rise to a related question...

This has probably been answered before, or at least widely taught, but I've missed the train anyway so I'll ask.

Bubba, healthy and gainfully employed, suddenly dies on Dec 29, 2011. His pay period ended on Dec 27th, and on January 3, 2012, his employer delivers his final paycheck. His final paycheck contains a substantial amount of accrued vacation and other assorted benefits.

FEDDUKE prepares his 2011 tax return, thought to be his final return. But during January of 2013, his family brings in a W-2 for 2012 for $18,000.

1. Is the $18,000 reported on a 1040 or a 1041?
2. Is the $18,000 reported for 2011 or 2012?

Assuming the W-2 has 2012 on it, that precludes a Form 1040 for the deceased, since you cannot file a return for him for the year following the year of death. And it cannot be included on 2011. It won't match. The check should have been issued to the estate, form 1099MISC issued and reported on Form 1041 as IRD. The problem arises trying to get the withholding applied correctly, as I am assuming that there WAS withholding on this amount of money?

You may have to go back to the employer on this. See instructions for completing 1099MISC, which clearly state no W-2 is to be issued; a form 1099MISC is issued for the amount (Box 3), under the EIN of the estate, or SSN of the beneficiary (usually if a spouse is involved). This solves the problem of getting credit for withholding. AND no FICA/MC taxes are to be withheld! If that happened, the only way to get those back is from the employer, who adjusts his next 941 to accommodate the refund.

[Bees Knees]

Usually an employer knows right away when an employee dies. The fact that he/she does not show up for work the following day is an indication something is wrong.

Assuming the employer finds out within a day or two of the decedent's death, any payroll department with any kind of knowledge knows wages paid after an employee's death is treated different. So your scenario is one where the guy doing the W-2 one year after the employee's death has no business doing payroll. Assuming that is the case, you get the employer to correct this, as Burke said.

[Golden Rocket]

Thanks to All

Thanks to Burke and Bees Knees for giving direct and relevant answers.

You are giving employers too much credit. They will know of the death (unless the payroll office is remote, such as WalMart), but they will not know what kind of document to issue. This doesn't happen to me every year, in fact it has happened only once in my career. The employer gave a W-2 but had sense enough to know that FICA and Medicare taxable wages were zero.

Thanks for clearing this up...

[Bees Knees]

You are giving employers too much credit. They will know of the death (unless the payroll office is remote, such as WalMart), but they will not know what kind of document to issue.

Well, actually payroll departments do know how to handle this, unless the employer is a small employer and doesn't have the sense to hire a payroll service that understands how to handle employee deaths.

We all understand the need to hire a tax professional to prepare a correct tax return, as the do-it-yourselfers seem to manage to mess things up all the time. The same is true for payroll. Don't try this at home. Hire a payroll service to handle these things.

[Burke]

Actually, I have had this happen on more than one occasion, especially when the salary was earned in one year (i.e, late December) and paid in the next pay period which falls in the next calendar year. If someone does not get in there and code the computer/payroll records fast enough, it will surely kick out a regular pay check. In this case, it appears someone did have to code it to pay accrued vacation (due to death), so it is someone's fault for not fixing it right then. One correction to my reply post: refunding the FICA taxes by adjusting the next 941 was the old method; now we have 941-X. So they can file it for the 1st quarter of 2012, and also issue a corrected W-2 (showing zero) and a new 1099MISC for the heirs to use.

[Nashville]

Payroll in the Rural South

Well, actually payroll departments do know how to handle this, unless the employer is a small employer and doesn't have the sense to hire a payroll service that understands how to handle employee deaths.
Hire a payroll service to handle these things.

I'm not taking issue with your advice, but perhaps a geographical/cultural difference exists in small-town or rural [Tennessee, Alabama, Georgia, Arkansas, etc]. Although the favored situation may include a few scattered Fortune 500 companies and plants, the majority of employers have 10 employees or fewer. The typical paymaster is the wife or some relative of the owner(s) and could never have been chosen for the job on her/his own merit. Most of these employers pay very frequent penalties for screwing up their 941s and W-2s.

Sometimes a salesman from ADT or some competent payroll service will walk in and tell the owner his payroll problems are over. The owner eyes light up like a Roman candle. But after enrolling, the owner finds out:
a) ADT will prepare the payroll tax returns, but will not pay them except out of the owners' money. (Imagine that)
b) The employee shortchanged 4 hours and gets an extra check from the owner on Friday won't get processed by ADT without the proper paperwork the following week. The chances of this happening properly? Slim and none.
c) The responsibility for entering time, rates, deductions, withholding status, etc. falls on the same incompetent person that it did prior to ADT. Garbage In, Garbage Out.

After a couple months of ADT, the owner fires them because the real payroll problems have not been solved. A client who runs a good tight payroll ship or uses ADT like they're supposed to is so rare as to be idyllic in our neck of the woods.