How to Report Taxes on Executor's or Fiduciary's Pay

Payment to the executor's or fiduciary of an estate is taxable income on Line 21 "other income" on the Form 1040. This income isn't subject to self-employment tax unless the executor is in the routine business of handling estates or unless there was an actual business in the estate which the executor was paid to run (see Publication 559 as a google search).

Example: If you are an executor, personal representative, or fiduciary of an estate and you received, say $10,000 from the estate for serving as the executor:

Put the $10,000 on Line 21 of Form 1040 (the line titled "Other Income", which is also where you put gambling winnings). The line number may change as the Form 1040 slightly changes each year. The $10,000 is NOT subject to self-employment tax UNLESS you are in the routine business of serving as an executor or unless the estate had a business in the estate and the executor actively participated in that business. So, if this is a one-time occurrence where you are the executor of your relative's estate, then you are NOT in the business of being an executor, and the income is therefore not subject to self-employment tax. Do a Google search for "Publication 559" and on page 3 there is a paragraph titled "Fees Received by Personal Representatives". That paragraph states exactly what I said above.

Here is why it matters whether you are subject to self-employment tax:
When you work as an employee at a company, your employer withholds from your paycheck money for your federal taxes, state of Ohio taxes, and possibly city and school district taxes. Your employer also withholds 7.65% for social security (6.2%) and medicare (1.45%) [this 7.65% is also known as FICA tax]. This is why employees usually do not owe federal taxes in April when you file your tax return for the prior year - because your employer withheld it for you during that year (the government doesn't trust you to withhold it for yourself, so the govt requires your employer to withhold for employees). Your employer must also pay out of the employer's own pocket an "employer match" where the employer pays another 7.65% on your behalf. So the total FICA tax ends up being 15.3% (7.65% from the employee and 7.65% match from the employer). Each year it changes, but in 2009 the 15.3% is on the first $106,800 (which increases each year for inflation).

If you are, say, a self-employed painter - then no employer is withholding taxes for you. So you are expected to make quarterly estimated payments for federal, state, and city taxes. You will also have to pay the full 15.3% FICA tax yourself. You will as self-employed get a slight deduction on Line 27 of the Form 1040 (the line that says "One-half of self-employment tax"). So you will get to deduct 7.65% on Line 27. But this deduction on Line 27 provides you with little overall benefit. It just reduces your 15.3% to around 14%.

In summary, when you are the typical executor receiving $10,000 you might be taxed at a federal rate of around 20% or $2,000. But if you were wrongly considered to be subject to self-employment tax, then you would pay not only the $2,000 tax, but another $1,400 of tax (the self-employment tax is reported on Line 57 on page 2 of the Form 1040 on the line titled "Self-employment Tax. Attach Schedule SE").

If you receive a letter from the IRS several years after the estate closes saying you owe us $1,400 plus interest, they are incorrect. The IRS just wants to make sure the $10,000 of "Other Income" on Line 21 is not from a business. Here is what you do: Call the phone number at the top of the IRS letter and explain what the $10,000 is. They will then want you to fax or mail to them verification of what the $10,000 is. So send them documentation from the probate court of the $10,000. If you already threw away everything from the estate, then the probate court in the county where your relative died will make copies of the estate for you for several dollars to pick up. Also state in your letter to the IRS that this income is NOT subject to self-employment taxes, and print off the page in Publication 559 stating this.

ABOUT THE AUTHOR: Phil A. Cornelius, JD, CPA
Phil Cornelius worked as a CPA for three years before attending law school at University of Dayton. He now runs his own general practice law firm in southern Dayton and is taking classes at night to receive his LLM in tax (masters in tax) degree.

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

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