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Handling Wages and Benefits Owed to Deceased Employees

No boss plans for it, but there’s always the possibility that someone who works for you might die. Losing an employee this way may spell tough times ahead for your company, especially if your team is close-knit. Financial considerations are the last thing you want to think about while mourning a friend, but you do have to take care of them. Here’s how you handle the wages and benefits issue for a deceased employee.

How to Handle Wages and Benefits

When a current employee dies, they usually have unpaid earnings . Depending on how often you issue paycheques, the amount could be substantial. It can climb even higher once you add unused vacation pay. Your company may or may not offer a death benefit, which is an additional payment to a deceased employee’s spouse, common-law partner, or heir to recognize the employee’s service. Often, some or all of this benefit is tax-exempt.

So how do you handle this money? It depends on what stage you’re at in the payroll process. Suppose you issued the employee a cheque, but the employee died before cashing it. Since the cheque was written to a person who is no longer living, it is effectively worthless. But you still owe the employee – or, more accurately, their estate or beneficiary – the money.

That means you would need to reissue the cheque, payable to the estate or beneficiary. It’s also a good idea to have the person receiving the cheque sign a statement that acknowledges what the payment is for.

If the employee accrued wages and benefits but no cheque was issued, you would also write the cheque to the employee’s beneficiary or estate. This includes any adjustments to pay that you and the employee agreed upon before their death.

How to Handle Canada Pension Plan Contributions

Making CPP contributions is required for employers and employees. The employee’s contribution gets deducted from their paycheques. So how do you handle CPP deductions for an employee who is now deceased? If the employee earned and was owed the money before their death, which is usually the case, then make a CPP deduction as usual. But if you are making a payment after death that does not involve money earned beforehand, do not deduct for CPP. A death benefit made to an employee’s spouse or heir is one situation where this comes into play. If your business is in Quebec and you make contributions to the Quebec Pension Plan, the rules can be slightly different. Revenue Quebec can guide you through the process of making proper deductions for a deceased employee.

What to Do About Employment Insurance Premiums

Canadian employers and employees are also required to pay employment insurance premiums. These also come out of each paycheque. They fund temporary insurance benefits for workers who lose their jobs, get sick, or have family issues. For a deceased employee, treat EI premiums the same as you treat CPP deductions. If the money was earned before the time of death, deduct EI premiums just as you would for a still-living employee. But you do not have to deduct EI from death benefits or other monies paid after the worker’s death.

How to Account for Income Tax

You should deduct income tax from your deceased employee’s paycheque in these situations:

  • The cheque is for salaries, wages, vacation benefits, and other money that the employee earned before the time of death;
  • The cheque includes income adjustments resulting from agreements made with the employee before the time of death.

But in the following situations, you should not deduct income tax:

  • The cheque is for wages or benefits accumulated after death. For instance, a death benefit or sales commissions not realized until after the employee passed away;
  • The cheque includes income adjustments resulting from agreements made with the employee’s estate or beneficiary after the employee’s death.

What Are the Reporting Requirements for Benefits Paid to a Deceased Employee?

You are required to report all money paid to a deceased employee on their T4 slip for the year in which the money was paid. This is true even if the employee did not earn the money in the same year you paid it. If the employee passed away at the end of December 2017 and you issued a cheque in January 2018 to cover accrued wages, you would report that payment on a T4 slip for 2018.

Workers’ Compensation for Deceased Employees

What if your employee died at work or while carrying out job-related duties? Then the worker’s survivors and beneficiaries could be eligible for workers’ compensation benefits. If the employee had dependents, they could receive compensation and benefits as well.

Workers’ compensation payments to a deceased worker’s spouse, family members, or dependents are known as survivors’ death benefits. To receive these benefits, the survivors would need to file a workers’ compensation claim. The process is similar to an injured worker filing a claim on behalf of himself or herself.

One of the worst situations a small business owner can face is the loss of a valued employee. By getting the financial side of things right, you can take care of the worker’s family and loved ones and not make a bad situation worse for your business.

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