payment to deceased employees wife

[Janice F]

Employee dies in 2009, NQDC plan indicates his balance is to be paid to surviving spouse. Per 2009 IRS instructions, this now gets reported on a 1099-MISC. I think it goes in box 3 Other Income. Is the distribution subject to FICA, Medicare or SE (Self employment) tax?

Any assistance is appreciated.

[Guest Mr. Kite]

Look at IRC 3121(v)(2) -- it may have been reported as FICA wages in the year it vested.

[david rigby]

Look at IRC 3121(v)(2) -- it may have been reported as FICA wages in the year it vested.

Maybe, but that is (probably) a different question.

I've wondered the same thing as the original question, which I restate in my own words:

"When a NQ payment is being made to an employee/retiree and the payment is subject to FICA, does the FICA (and FUTA?) taxation change if a portion or survivor benefit is paid to a beneficiary?"

[XTitan]

My understanding is that payments to beneficiaries would be subject to FICA in the year of death only. Payments made following the year of death would not be subject to FICA.

[david rigby]

Can you help by providing a source?

[jpod]

This is all covered in great detail in the W-2 and/or 1099-Misc instructions. This is my recollection and may not be 100% correct, but if payment is made in the same year as the year of death, and if there is a FICA tax liability (and there may not be due to 3121(v) rules), I believe that the FICA wages and FICA tax withheld are reported on the deceased employee's W-2 for that year. Regardless of the FICA situation, the amount paid is reported on the surviving spouse's 1099-Misc.

[Guest Mr. Kite]

Under what conditions can the funds in a NQDC account be subject to FICA (assuming the employer has been compliant with 3121(v)(2))? Under the nonduplication rules, once NQDC funds have been treated as FICA wages, those amounts, and the earnings thereon, will not again be treated as FICA wages.

The W-2/1099 issue regarding payments in the year of death or the year after death relate to "wages" the employer owes the deceased employee. These amounts aren't "wages."

Now, if any portion of the employee's compensation earned during the year of death is contributed to the NQDC account, the payment would be considered a payment of FICA wages to the employee at the time of the deferral (again, see 3121(v)(2)), and therefore reported as FICA wages for the period preceding his death, regardless of when the NQDC account is paid to the surviving spouse.

I don't know what the result would be if the employer neglected to treat the employee's deferrals as FICA wages under 3121(v)(2).