W-2 After Employee's Death
When an employee dies, his or her employer must still issue a W-2 for the final tax return of the decedent. Details about proper wage reporting can be found in the following paragraphs.
When a taxpayer passes away, employers frequently incorrectly handle the reporting of accrued wage payments, often to their own detriment, and end up paying matching payroll taxes when they are not required to do so. According to the IRS W-2/W-3 Instructions (page 8):
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Payment made after death but in year of death – The employer should withhold Social Security (SS) and Medicare taxes and report the SS and Medicare income in boxes 3 and 5 (along with pre-death SS and Medicare wages) to ensure proper Social Security and Medicare credit was received. Box 1 of the W-2 should include only compensation paid prior to the employee’s death. Instead of including the post-death payment in W-2 box 1, the employer should issue a 1099-MISC (not a 1099-NEC) for the post-death payment, reporting that income in Box 3 of the 1099 issued to the estate or beneficiary.
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Payment made after the year of death - Do not report it on Form W-2 (thus no withholding or payroll taxes). Issue a 1099-MISC (not a 1099-NEC) and report the payment in Box 3 for payment to the estate or beneficiary.
Where an employer has incorrectly handled the wage payment made in a year after death, the correct thing to do would be for the employer to amend the W-2 to no W-2 and refund to the taxpayer’s estate all the withheld payroll taxes and issue a 1099-MISC. No doubt the employer will be reluctant to do all that especially after the 1099 and W-2 filing due dates have gone by. As a work-around the estate executor or trustee could forego the SS and Medicare taxes and report the W-2 wages on a 1041.