How to handle a deceased employee’s final paycheck

It’s a sad fact of business that at some point an employee may
pass away while employed with your company. Handling their final paycheck is
not as simple as just cutting a check. There is a whole laundry list of action
items that have to be completed before you can issue the employee’s final
paycheck.

What to do (from a payroll perspective) if one of your employees dies

If you don’t already have an SOP for when this happens, read on for what you should know so you aren’t scrambling at the last minute. Or better yet, just partner with a professional employer organization (PEO) that already has these processes in place and can handle the hardships for you.

Step 1: Figure out which scenario you’re dealing with

How an employer should handle the final paycheck of a deceased employee is dependent on one of three scenarios:

• The employee was issued their final check but it wasn’t cashed.
• The employee died before a check was issued for work performed during a pay period in the current calendar year.
• The employee died before a check was issued for work performed during a pay period ending in the following calendar year.

For our purposes, we are just going to discuss what you need to know when an employee dies and the check is issued in the same year.

Step 2: Check the applicable employment laws

There are many laws that affect how to pay out any final accrued salary and benefits to a deceased employee.

Some states won’t allow the check to be paid to the next of
kin and must instead be paid to the estate. State laws can also dictate whether
the benefits are subject to state income tax withholding, what the max payable
amount is before probate, and other conditions that must be met.

And don’t assume you can just send it through the employee’s
direct deposit – the account could be frozen, and thus the money is returned,
or the family may not have access to the account, etc. Difficult though it may
be, it’s best to contact the family and find the best person to issue the check
– but make sure you aren’t violating any laws in doing so.

Federally, you likely won’t have to withhold income taxes (unless the check is paid out the following year), but FUTA still applies. If your state follows FUTA regulations, then SUTA is also likely to be applicable. If you don’t know, check with your legal advisor or, better yet, just leave it to your PEO.

Step 3: Know what forms are required

Before you can even begin issuing the check, however, you
need to get confirmation of the person’s death. The final payment is on hold
until this information has been verified. You will also need the employee’s
legal ID information, as well as the Tax ID or the Social Security number of
the estate’s legal representative.

The paperwork that goes with a deceased employee’s accrued
wages and benefits payout is quite hefty. This is somewhat dependent on who is
receiving that final check, the estate or another representative, as well as
the laws in place.

Don’t forget that a W-2 and/or 1099-MISC are the bare
minimum of what must be issued with the paycheck.

Social Security, Medicare and applicable jurisdictions must all be contacted and notified of the final amounts withheld from the deceased’s paycheck. If there were garnishments on the check, those parties must also be contacted.

Yes, there’s (way) more

Honestly, there’s a lot more involved in the processes that take place when a deceased employee has an outstanding paycheck or payout of benefits. Do they own stocks? Does the company PTO policy also include a payout of the accrued days off? Is there a workers’ compensation or ADA claim involved?

The easiest solution – contact G&A Partners to find out how our team of experts can handle your payroll questions and problems for you.