Clyde Snow

Processing the Final Paycheck for a Deceased Employee

by | Sep 14, 2023

As a business owner, you have probably encountered situations where you found yourself unprepared. Let’s be honest. No matter how hard we try to anticipate future events, there will always be somewhere we find ourselves unprepared. One incident that no one is ever fully prepared for is the unexpected death of an employee. Navigating the loss of an employee may involve intense sadness for you and your other employees, as well as operational emergencies. As a business owner, you may need help figuring out what to do. One of the first practical challenges that may present itself is what to do with the employee’s final paycheck.

Cutting the Final Paycheck: Who to Pay

You can probably intuit that you must pay the deceased employee’s unpaid wages earned before their passing. But the question is, who should you deliver payment to? 

Typically, final pay will go to the deceased employee’s spouse or estate. In certain situations, final wages may be paid to a surviving dependent, adult child, or even to the deceased’s parent or sibling. However, local laws vary on who the wages should be paid to, so it is important to consult a lawyer in the state where the employee resided to ensure the funds are distributed properly and in compliance with state law.

Tax Withholding Requirements for Final Payment

Final wages paid for a deceased employee are subject to some, but not all, standard payroll tax withholdings. Here are the specific withholding requirements employers should be aware of:

  • Federal income tax does not need to be withheld from a deceased employee’s final paycheck, even though wages are generally subject to federal income tax. 
  • FUTA (Federal Unemployment Tax) and FICA taxes (Social Security and Medicare) do need to be withheld from the final wages unless the wages are paid in the same year as the employee’s death.
  • Employers should check their state’s specific requirements for any additional withholding that may apply to final wages paid to a deceased employee. Some states may require state income tax to be withheld.

The survivor or estate will receive a Form 1099-MISC reporting the final pay as “other income” in Box 3. The wages will not be included in Box 1.

Additional Payroll Considerations for a Deceased Employee

When an employee passes away, employers need to consider what other compensation, benefits, and notices need to be provided to the employee’s heirs. Here are some additional considerations:

  • Accrued paid time off – Review your policies to determine if unused vacation and sick/personal time are paid to employees upon termination, resignation, or death. If so, factor those hours into the final paycheck.
  • Deferred compensation – If the employee had a nonqualified deferred compensation arrangement, check the plan document for any special provisions addressing what happens when participants die. The disbursement of funds could follow different rules.
  • COBRA – If the employee had company health insurance, their spouse and dependents may be eligible to continue coverage temporarily under COBRA. You will need to provide the COBRA election notice.
  • Retirement plans – Pension funds, 401(k) balances, and other retirement plans typically have designated beneficiaries. Review plan documents on how the funds are distributed if an employee dies.
  • AD&D Benefits – Check on any company life insurance or accidental death benefits the employee had through your workplace policies.

Preparing the final paycheck for a deceased employee requires special considerations. Paying final wages accurately and with care demonstrates respect for the deceased employee and helps the company stay compliant.

In addition to federal laws, states may have additional requirements, forms, and caps on how much you may distribute outside of the probate of an estate. For help with a deceased employee’s final pay in Utah, consider contacting Clyde Snow & Sessions’ Labor and Employment Group. Our attorneys specialize in complex matters and will be able to assist you with your labor and employment needs. 

Key Takeaways

  • When an employee passes away, their unpaid wages must still be paid to their surviving spouse or estate, depending on state law. Consult a lawyer on who should receive the funds.
  • Federal income tax does not need to be withheld from a deceased employee’s final paycheck, but FICA taxes and FUTA still apply unless the wages are paid in the year following death.
  • In addition to regular wages, the employer should consider whether to provide accrued PTO, deferred compensation, COBRA coverage notice, and any payouts from retirement plans or company life insurance.
  • The survivor or estate will receive a Form 1099-MISC for the final payout, reported as “other income.”
  • Review company policies and plan documents closely to ensure the final payout is distributed correctly to the right beneficiaries.

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