Losing an employee is a confusing and painful time for many people. When a colleague passes away, employers not only grieve the loss of their team member, but they also have to figure out how to move the business forward. Although it feels like it’s not the best time, the business does have to take steps to ensure that the job position is filled again and that the necessary paperwork is taken care of. One of the first things that needs to be handled is the employee’s final wages. What does one do with their final paycheck? What happens to time off? And what taxes should be filed?
After an employee passes, the payroll department (or payroll processor) needs to be informed of the death as soon as possible. They will freeze all wages until the employee’s death certificate, W-9 forms, or more are sent. Once the death has been reported, the employee’s wages will need to be taken care of with the IRS. Here are some tips to move forward with the process:
Who can claim the deceased employee’s wages?
The employee’s beneficiary or estate will obtain the employee’s wages. In some cases, the outstanding wages may go directly to the person’s spouse. Also, the outstanding wages may go to children, parents, siblings, and so on. However, this is entirely dependent on each state’s law. For example, California law states that the earnings may go to the deceased employee’s spouse, up to a certain amount of compensation:
“The employer, upon receiving such a statement and “reasonable proof of identity of the surviving spouse,” must “promptly pay” the surviving spouse “the earnings of the decedent, including compensation for unused vacation, not in excess of fifteen thousand dollars.” Cal. Prob. Code §§ 13601(b), 13602.”CA.GOV
That being said, it’s incredibly important to take the federal and state law in mind when handling final paychecks. Speak with your local labor board to figure out what your state policy is.
How to handle paychecks
If the employee dies during the year, the accrued wages, vacation pay, and any other compensated pay must be reported. All wages that were available to the employee while they were alive will go to the beneficiary, estate, or spouse (depending on state law).
Timing is one of the most important factors when it comes to handling a deceased employee’s paycheck. There are different steps to take depending on when the employee passed and when the paycheck was issued:
Paycheck issued before death
If the employee’s check was issued before death, the check must be canceled immediately. The check should be reported to the employee’s beneficiary or estate, and the payroll taxes will still be withheld. The wages and payroll taxes should be reported on the employee’s W-2 form with the year’s wages and tax withholding.
Paycheck issued after death
If the final paycheck is issued after the employee’s death, this means that you still owe the employee wages. You will make the final payment to the person’s beneficiary or estate. The estate or beneficiary representative will complete form W-9. Once the employer gets the representative’s information, they will make a final paycheck . The gross amount should be reported on Form 1099.
If you made the payment after the employee’s death but in the same year that the employee died, you must withhold certain taxes. In this specific case, you will withhold social security and medicare taxes on the payment. This must be recorded on the employee’s W-2 form. This ensures that the proper social security and medicare credit is received.
Final Paycheck is issued within the same year
If the employee was paid in the same calendar year that the employee died, federal income tax withholding will not be deducted. There are certain taxes that are withheld, and these rules should be clarified with the state labor board.
Final paycheck is issued the next year
If the final paycheck is issued after the employee passes, the employer does not have to withhold the FITW, FICA, or FUTA tax. When the employer makes the final payment, they will fill out Form 1099 to the beneficiary or estate. The state may have different regulations about withholding taxes in this specific case.
For more instruction, please go to the IRS’s guide for Deceased Employees Wages.
Our organization currently has employees in almost every state. Is there a listing by state that we can use to ensure we are paying out our decease employees wages.
There’s not a state-by-state guide that I can find; however, your HR representative might have more resources that you can utilize.
If an employee dies, should 401k contribution and match be applied to final deceased wages paycheck?
That is a great question, but unfortunately I don’t have the answer. Since a 401K match is up to the employer’s discretion, I assume that they can choose to include the contribution in the last paycheck. To be sure as to how this is handled, I recommend speaking with a tax/payroll expert.
My husband passed away on the 14th and about 10 days later I received his final paycheck in the mail. It was not made out to me but to his estate and unfortunately he didn’t have a will or trust because we weren’t thinking about that. He was only 56. Now supposedly because I live in Oklahoma I’m going to have to get a lawyer or something to be able to deposit that check into our joint checking account. From what I figure if I have to go through probate that will cost about a third of my husband’s final check! Not happy with this!!