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Processing Final Paychecks for Deceased Employees

By Jo McClure, CPP on Jan 02, 2023
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processing final paychecks for deceased employees

It’s an unfortunate event that could happen to any business owner at any time - you receive word one of your employees has passed away. It can be a confusing and difficult time for employers, but the sooner administrative tasks are dealt with, the better.

From HR to payroll and benefits, there are a lot of loose ends to wrap up. And while the death of an employee isn’t something we like to think about, being prepared will make it less complicated. It’s important to note, rules can vary widely from state to state.

For example, the maximum wage an employer is allowed to pay the survivor before the estate has been administered can vary widely. That said, here are 10 general steps employers should take when making deceased employees’ final payments.

RELATED: 5 Best Practices for Pain-Free Payroll Processing >>

1- General Steps to Take When Making Deceased Employees' Final Payments

Immediate Actions

Update Your Payroll System

To prevent further wages from being paid as though the deceased employee is still actively working, terminate employment in the payroll system. 

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Pending Payments 

If the employee has any paychecks that were uncashed at the time of death, the check must be canceled and reissued to the employee’s beneficiary, executor or personal representative in the same net amount and withholding and according to the employee resident/lived in state law.

The gross wages associated with the reissued payment would be indicated on the former employee's Form W-2, Wage and Tax Statement, using boxes 1, 3 and 5, with withheld amounts for federal income tax included in box 2, Social Security tax in box 4 and Medicare tax in box 6.

These wages and withholding amounts should be reported on the deceased employee’s W-2. No 1099-MISC is required.

If it's a pay week and a direct deposit is pending, let it go through. Payments that were made or initiated by direct deposit to employees who were alive when the payroll was processed, but who died before the check date or before they withdrew the funds are not reversed. However, direct deposits should be stopped for future earning payments to be made after the employee's death.

Review State Probate Laws

Double-check your state’s probate laws for any limits on wages that can be paid to the survivor of a deceased employee. 

Persons claiming a right to a deceased employee's estate must present legal documentation verifying their relationship to the deceased and their authorization under state law to make a claim. An affidavit, a letter of administration and an acknowledgment receipt are three of the most common documents required by the state to claim an employee's estate.

state by state guide final paycheck deceased employee

Issuing Payment

Before issuing payment, always verify the employee's termination reason is deceased. These earnings are not subject to federal income tax withholding but are subject to Social Security and Medicare taxes. 

For deceased employee earnings payments that are processed in the year the employee died and not issued while the employee was alive:

Form W-9

In most cases, the deceased employee will be owed wages. Employers generally should receive a complete Form W-9, Request for Taxpayer Identification Number and Certification from the beneficiary or estate of a former employee before payments based on service the employee performed are sent to the beneficiary or estate.

If there is not an executor or personal representative, wages cannot be paid until the will is probated and a tax identification number has been issued to the estate.  

Forms W-2 and 1099-MISC 

If final wages are paid during the same calendar year the employee died in, report them on both Form W-2 and 1099-MISC. On Form W-2, wages and taxes are reported in Boxes 3-6, with no federal income tax withheld. Nothing is reported in Box 1.

Then on Form 1099-MISC, report the gross payment in Box 3. Note: Wages paid in the year of death are not subject to income tax withholding, but employment taxes, such as FICA, must be withheld. 

Wages Paid in Next Calendar Year 

Probate or other delays may cause final wage payments to be issued in the following calendar year. If this occurs, the final payment is not subject to the employment taxes withheld during the year of death. The amount due should be made to the deceased employee’s estate. Only Form 1099-MISC is required; no Form W-2 should be completed. 

Although state laws usually follow federal laws for this situation, employers should confirm the resident state laws which address the maximum amount of wages that can be paid, the person to whom the wages should be paid, special conditions that are required before payment, and whether the wages are state income taxable. Local taxes need to be looked at on a case-by-case basis.

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Final Items

Accrued PTO 

Review state laws to determine if and how other compensation should be paid. This includes unused vacation pay and sick or personal leave time. In the absence of state law, employers should follow their company policy for paying out accrued, unused PTO. 

For example, in Missouri, according to Section 33.102, the value of the deceased employee's unused vacation days at time of death must be paid to the employee's designated beneficiary or to the estate.

However, in Kansas, no state law requires unused vacation days to be paid out. Compensation for the value of accrued, unused PTO days should be paid out per company policy. 

Garnishment

If the employee was subject to a wage garnishment order, those wages should still be withheld from the deceased employee's final paycheck. Additionally, as the employer of record, you must notify the court or government agency that issued the wage garnishment order of the employee's passing and resulting change of employment status with your organization to release your business from liability.  

If you are notified of an employee's death, it should always be communicated with your human resources team so that other benefit steps can be addressed, including life insurance. At this stage, a death certificate may be requested at this point for life insurance purposes.

Life Insurance

Identify the beneficiaries for employer-provided benefits, such as life insurance. Notify the beneficiary or personal representative of the available benefits. 

COBRA

An employee’s death counts as a COBRA qualifying event. Terminate the employee’s health insurance as of the date of death and notify additional family members on the policy of COBRA rights, including a spouse or dependents. 

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Axcet HR Solutions provides full-service human resources administration to small and mid-sized businesses in the Greater Kansas City metropolitan area. When you outsource human resources to us, we’ll provide expert employee benefits administration, payroll, safety, and workers' compensation services. Find out more about our payroll and tax administration services.

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Written by Jo McClure, CPP

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