Rev. Rul. 64-150

Advice has been requested whether the gross or the net amount of the salary earned by an employee, but unpaid at his death, is required to be reported on Form 1099, U.S. Information Return, where deductions for FICA, retirement, health and life insurance, etc., are made from the accrued salary before its payment to the estate or beneficiary.

Section 6041(a) of the Internal Revenue Code of 1954 requires all persons engaged in a trade or business and making payment in the course of such trade or business to another person of salaries, wages, compensations, remunerations, or emoluments, with exceptions not pertinent hereto, of $600 or more in any taxable year, to file an information return with respect to such payments.

Under the general rule stated in section 691(a)(1) of the Code, the entire amount of salary earned by an employee, but unpaid at his death, unreduced by the amount of any deductions required to be made from such amount, is income in respect of a decedent and is includible in the gross income of the recipient, for the taxable year in which it is received.

However, under section 691(a)(3) of the Code, such amount of salary is considered to have the same character in the hands of the recipient which it would have had in the hands of the decedent had he lived to receive that amount. Therefore, if any portion of the salary would have been excludable from the gross income of the decedent, under the provisions of section 105(d) of the Code, had he received it prior to his death, then that portion would not be income in respect of a decedent and would not be includible in the gross income of the recipient. Further, such income would not be subject to the withholding of tax under section 3402 of the Code.

The employer is required, under section 6041(a) of the Code, to report on Form 1099, U.S. Information Return, accompanied by Form 1096, U.S. Annual Information Return, the total amount of salary, if $600 or more, unreduced by the amount of any deductions, even though only the net amount is actually paid to the deceased employee's estate or beneficiary.

Although the employer must report the entire payment as gross income on Form 1099, he may indicate on Form 1099, or by an identifiable accompanying letter, that the amount returned represents the total payment of salary made to the beneficiary or estate during the calendar year, without attempting to determine what portion of the payment represents gross income and what portion is excludable under section 105(d) of the Code.