APA Certified Payroll Professional CPP-Remote Question # 40 Topic 5 Discussion
CPP-Remote Exam Topic 5 Question 40 Discussion:
Question #: 40
Topic #: 5
At the time of death, an employee was owed wages and accrued vacation. The employee ' s estate was paid on January 2 of the following year. What are the employer ' s reporting requirements for the payment for the year after death?
A.
Form W-2, Box 1 only
B.
Form W-2, Boxes 1, 2, 3, 4, 5, 6
C.
Form W-2, Boxes 3, 4, 5, 6 and Form 1099-MISC, Box 3
The tax treatment of payments to a deceased employee ' s estate depends on the timing of the payment relative to the year of death. If wages are paid in the same year as the death, they are exempt from FIT withholding but subject to FICA and FUTA (reported on W-2 and 1099-MISC). However, if the payment is made in the year after the death (as in this scenario, where the employee died in one year and payment was made on January 2 of the next), the payment is completely exempt from all payroll taxes (FIT, FICA, and FUTA). In this case, no Form W-2 is issued at all. Instead, the entire gross amount is reported as " Other Income " on Form 1099-MISC, Box 3 , issued to the employee ' s estate or beneficiary. This is a common trap on the CPP exam regarding the timing of deceased employee payments.
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