Payroll in Practice: 3.21.2022

Question: An employee requested a corrected Form W-2 for 2021 because of a name change that occurred in January of 2022. The employee would like to file 2021 income tax returns using the new name. Is the employer required to issue a corrected W-2?

Answer: The name the employer reports on Form W-2, Wage and Tax Statement, should be the name that the employee provided on the Form W-4, Employee’s Withholding Certificate, that was in effect when the W-2 was prepared. Otherwise, the IRS may notify the employer that the name on the W-2 does not match the information it has on file provided by the Social Security Administration.

The employer should not update an employee’s name in the employer’s system unless the employee provides a new Form W-4 to the employer along with a Social Security card bearing the new name.

Nevertheless, a misspelled name on a Form W-2 should be corrected because it may cause a mismatch with the W-2 that is filed with the SSA. The employer may face a penalty if the name and Social Security number on the W-2 do not match the IRS’s records.

The name on Copy B of the W-2 does not necessarily matter for filing Form 1040, U.S. Individual Income Tax Return. For an electronically filed Form 1040, the preparer may include the name as it appears on the W-2 if it differs from the name the employee used for filing the return. This helps the IRS sort things out at their end. For a paper tax return, Copy B of the W-2 is attached to the return that the taxpayer sends to the IRS. The IRS then matches the information the employee reported on Form1040 to the information the employer submitted to the SSA on Form W-2.

A more serious issue could occur if the SSA was not notified of the name change and the employee tried to file a tax return under the new name. On an electronically filed Form 1040, a mismatch would result if the name and Social Security number on Form 1040 differed from the IRS master file as provided by the SSA and the IRS would reject the return.

Resubmitting the electronic Form 1040 using the former name can correct the problem. However, if that return is also rejected, the employee may have to file a paper return, possibly because the employee’s Social Security number appeared on a tax return filed earlier in the tax season by someone else, either in error or to commit fraud or ID theft. The return may also be rejected if a dependent filed a return as a non-dependent before the parents file their return.

In most cases, as long as the information was correct at the time the Form W-2 was prepared, an employee’s rejected tax return should not affect the employer. At worst, the employer might receive a proposed penalty notice. In that case, to prevent a penalty assessment, the employer should provide documentation showing reasonable cause for the mismatch due to the timing of the name change.

Question: An employee died a few days before Jan. 1, and the employer is preparing to pay the decedent’s accrued vacation and paid time off to the employee’s sole beneficiary, who is also an employee of the employer. Should the employer add the payment to the beneficiary’s 2022 wages and report the payment on Form W-2? Or, should the employer obtain a Form W-9 from the employee and report the payment on Form 1099-MISC?

Answer: This is a wage payment for compensation earned by the deceased employee. If the wages were paid or constructively received by the employee before death, the wages would be included in the decedent’s Form W-2, Wage and Tax Statement, for all tax purposes. Constructive receipt is a cash-basis concept that determines when cash is received for tax reporting purposes.

An employee is deemed to have received a wage payment when the employer makes the funds available to the employee. Courts have interpreted this to include funds in a paycheck or direct deposit that are available or mailed to an employee on a scheduled date before death, even if they are not received by the employee on that date.

However, if the wages were not paid or constructively received by the former employee before death, then the wages are “wages in respect of a decedent.” Wages in respect of a decedent are wages and compensation earned by the decedent that were not set aside in cash for payment to the employee at the time of death, such as accrued wages or benefits.

Wages in respect of a decedent are paid to the estate or to an appropriate person such as a personal representative, executor, or designated beneficiary. The employer will need to obtain a tax ID number from the designated payee, usually on Form W-9, Request for Taxpayer Identification Number and Certification. Constructively received wages may also end up being paid to an appropriate person, but the wages are reported on the decedent’s W-2 for income tax purposes, are taxable to the decedent in the year the decedent died, and are not reported as taxable income to the payee.

If the payee distributes the wages in respect of the decedent to other beneficiaries, the payee may need to issue nominee information returns. For example, an estate would issue a Schedule K-1 (Form 1041), Beneficiary’s Share of Income, Deductions, Credits, etc., to each beneficiary who received a share of the income from the estate. A personal representative may have to issue Forms 1099-MISC, Miscellaneous Income, to beneficiaries that received funds from the personal representative.

The reporting becomes complicated for income tax purposes because the wages are taxable to the payment recipient. That is, the wages are taxable on the decedent’s tax return if actually or constructively received before death or taxable to the recipient if the wages had not been actually or constructively received by the late employee before death.

IRS Publication 559, Survivors, Executors, and Administrators, and the instructions for Forms W-2 and W-3 have additional information on how to handle wages involving a deceased employee.

With respect to the payee in this case, the payment of the accrued benefits will be made in the year after the employee died. The payment is income in respect of the deceased employee. While the payment is subject to income tax, it is exempt from income tax withholding, because the payment is made to a beneficiary of the late employee.

Because, in this case, the beneficiary is also an employee of the employer, the employer has a tax ID for the beneficiary. However, it is still good practice to obtain a Form W-9 from the beneficiary for compliance documentation purposes. The W-9 documents that the employer has done the required tax due diligence with regard to reporting the payment and is not required to backup withhold income tax from the payment.

For income tax purposes, the wages in respect of the decedent are not included the late employee’s W-2 and income taxes are not withheld. The wages are paid to the beneficiary and reported on Form 1099-MISC in Box 3, other income, as income in respect of a deceased employee. The beneficiary is responsible for reporting the income on his or her individual tax return or issuing appropriate nominee information returns to the ultimate beneficiaries.

The payment to the beneficiary should not be processed through payroll as wages paid to the beneficiary because the wages were not earned by the beneficiary. The Social Security, Medicare and FUTA wages should not be credited to the beneficiary’s SSA or FUTA accounts. Check state laws regarding whether state taxes should be withheld.

Because the payment is made during a year after the year of death, the payment is exempt from Social Security, Medicare, and FUTA taxes. For federal tax purposes, no Form W-2 is required. If the payment had been made in the year the employee died, the payment would be subject to Social Security, Medicare, and FUTA taxes and the Social Security and Medicare wages and taxes would be reported on the employee’s W-2 for that year.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., or its owners.

Author Information

Patrick Haggerty is the owner of a tax practice in Chapel Hill, N.C., and an enrolled agent licensed to practice before the Internal Revenue Service. The author may be contacted at phaggerty@prodigy.net.

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