Wondering if I will have to declare as income for 2016 as it is not likely that my wife will get mt returned until much later in the year if at all.
Tricky. You receive money when you constructively receive it (that is, you recieve the money when you receive the check even if you cash it later). But I think it's a good argument that if the bank account was empty and the check was NSF, then you never constructively received it.
Is she a W-2 employee or independent contractor.
If independent contractor, I would argue that this should not be reported as income. If the employer issues a 1099-MISC that includes the amount, you can report the full amount of the 1099-MISC as income and then report the NSF check as a business expense.
If she is a W-2 employee, you will need to wait and see if you get a W-2 from this employer. If you don't get a W-2 or the W-2 is incorrect, there is a procedure to file a "substitute W-2" form to add your correct figures. But you will need to wait at least until Feb 15 to file (W-2s must be mailed by January 31.) Ideally you would try to get a corrected W-2 from the employer first.
You can also get your state labor department involved, they will have leverage against the employer and may even have a fund to pay off bad payroll checks, in which case this becomes income again.