The death of employee and final paycheck processes can leave small-business owners overwhelmed. From IRS rules for paying a deceased employee and state probate considerations to PTO payouts and COBRA notices, managing a deceased employee's final paycheck involves emotional and administrative complexity.
This guide walks you through the processes, step by step—so you can stay compliant, compassionate and prepared.
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As soon as you’re notified of the death of an employee, update your payroll system to reflect that status. This action ensures no further wages are paid out as if the employee were still actively working.
If the employee has any uncashed checks, cancel and reissue them to the beneficiary, executor or personal representative, based on state law. The check should reflect the same net amount and withholding as originally issued.
For reissued payments made in the year the employee died:
Include gross wages on the employee’s Form W-2
Box 1: Leave blank
Box 2: Federal income tax withheld (if applicable)
Box 3: Social Security wages
Box 4: Social Security tax withheld
Box 5: Medicare wages
Box 6: Medicare tax withheld
These wages should not be reported on a 1099-MISC when they were earned and paid during the year of death. Only future-year payments go on a 1099-MISC.
If a direct deposit was initiated while the employee was alive but before their death was known, allow the deposit to proceed. Do not reverse it.
However, cancel all future direct deposits for any remaining wages.
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Each state governs who is legally entitled to receive a deceased employee's final paycheck and under what conditions. Employers must confirm local probate laws before issuing payment.
Payment can only be made to the authorized party under your state’s rules, typically one of the following:
Surviving spouse
Legal beneficiary
Court-appointed executor or administrator
The estate (if no representative is yet appointed)
Commonly required documents include:
Certified death certificate
Affidavit of entitlement or small estate affidavit
Letter of administration or executor appointment
Completed IRS Form W‑9 from the estate or payee
Many states impose a maximum limit on how much you may pay out before formal probate. If the amount exceeds that limit, you must wait until probate is complete or until a small estate affidavit is accepted.
Federal tax requirements are another critical part of the death of employee and final paycheck process.
Wages owed for work performed before the employee’s death are not subject to federal income tax withholding, but Social Security and Medicare taxes (FICA) still apply if the payment is made within the same calendar year as the employee’s death.
If the final wages are processed after the year of death, then no federal income tax, Social Security, or Medicare taxes should be withheld.
If final wages are paid during the same calendar year the employee died:
Form W-2
Box 1: Leave blank
Boxes 3 and 5: Report Social Security and Medicare wages
Boxes 4 and 6: Report withheld Social Security and Medicare taxes
Form 1099-MISC
Report the gross amount of the final payment in Box 3
If final wages are paid in the following calendar year, the payment:
Is not subject to any employment tax withholding
Should not be reported on a W-2
Should be reported only on Form 1099-MISC, Box 3, issued to the estate or payee
Although most states follow federal guidance, employers should verify whether state income taxes apply, how much can be paid without triggering probate, and any local tax implications.
Before releasing any final wages, employers generally must obtain a completed Form W-9 from the beneficiary or estate. This ensures you have the proper taxpayer identification number (TIN) for Form 1099-MISC reporting.
If there is no executor or personal representative, you may not be able to issue the final paycheck until the will is probated and a TIN is issued to the estate.
This step is essential for staying compliant with IRS rules for paying a deceased employee and avoiding potential reporting penalties.
Employers must check both state law and company policy to determine how to handle unused vacation, sick time, or personal leave.
In Missouri, Section 33.102 of state law requires the value of any unused vacation days to be paid to the employee’s designated beneficiary or to the estate.
In Kansas, there is no legal requirement to pay out unused vacation time, so employers should follow their internal policy.
In the absence of state law, your employee handbook or PTO policy will govern how these benefits are handled.
Accrued PTO is typically included in the final paycheck and should be reported using the same rules as other wages, based on the calendar year in which they’re paid.
If the deceased employee was subject to a wage garnishment order (such as child support or a court judgment), any applicable garnishments should still be withheld from the final paycheck.
As the employer of record, you must also notify the issuing agency or court of the employee’s passing. This communication helps formally release your organization from any ongoing wage withholding liability related to that garnishment order.
This step is often overlooked but is necessary to ensure compliance and avoid future confusion.
Garnishment obligations must be addressed as part of the employee’s final pay process.
If your company offers employer-provided life insurance, locate the deceased employee’s beneficiary designation on file.
Notify the designated beneficiary or estate representative of the available benefits. Be prepared to provide:
A certified death certificate
The employee’s last day worked
Documentation confirming the employee’s eligibility under the plan
The employer’s HR department typically works directly with the life insurance carrier to help process the claim and support the family during this difficult time.
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The employee’s death qualifies as a COBRA qualifying event under federal law. As the employer, you must:
Terminate the employee’s health coverage as of the date of death
Notify the employee’s spouse or dependents (if they were covered under the plan) of their right to continue coverage under COBRA
The usual COBRA notice timelines apply, and your company must follow the proper process to remain in compliance.
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Make sure to retain documentation for:
Canceled and reissued checks
Completed Form W-9
Probate or estate documents
Garnishment release letters
COBRA notifications
Life insurance claim paperwork
Filed W-2 and 1099-MISC forms
Maintaining a full paper trail not only supports audit readiness but also ensures clarity if any questions arise from family members, payroll vendors or tax authorities.
Your SOP can include:
Internal contacts
Steps by role (HR, payroll, legal)
Document checklists
Communication templates for survivors or estate representatives
Creating a documented SOP for handling a deceased employee’s final paycheck promotes accuracy and consistency.
When an employee passes away, business leaders are tasked with managing an emotionally sensitive situation while staying compliant with federal and state law.
From terminating payroll properly to issuing the deceased employee’s final paycheck, each step must be handled with empathy and precision.
Axcet HR Solutions offers comprehensive PEO payroll services—including for difficult scenarios like employee death.
Our experienced, certified payroll professionals ensure every detail—from IRS forms to COBRA and PTO—is handled legally and compassionately.
👉Schedule a free consultation today >>
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