Paying Deceased Employees’ Wages Requires Compliance, Compassion

Employers should prepare to adequately process the final paycheck of a deceased employee by implementing a clear company policy, said payroll professionals at the 41st Payroll Congress.

Most employers lack a “coordinated strategy for determining who should receive final payment of a deceased employees’ wages,” said Stephanie Ernsting, director of HR operations at Amcor. “You’re going to need to coordinate with HR, Benefits, Legal, Accounts Payable, and Payroll.”

General Principles

The best place to start is with the implementation of a designated beneficiary form, specifically designated for the payment of an employee’s final wage. These forms “are going to differ from the employee’s designated beneficiary for benefits” said Linda Dailey, payroll manager for Bowman Consulting Group.

Beneficiary forms are not valid without an employee’s signature, Dailey stressed. To avoid issues at the time of payment, beneficiary forms should be updated annually. “Work with your benefits and HR team to make sure employees are looking at their benefit forms every year,” she said. “It can help avoid nasty confrontations” that might arise from an outdated form.

Communications with family should also be limited to a single contact, if possible, with a package that includes condolences, information on final pay, insurance, and the employer’s point of contact. “Nothing is more stressful than receiving document over document,” Ernsting said. “Ask for a single copy of the death certificate and share it. Try not to ask for it more than once,” she said. Employers should also designate a single person to communicate with family members to avoid duplicative and unnecessary contacts.

Unless specifically required to, employers should avoid setting up estate accounts when processing a deceased employee’s final wage payment. “It’s easier to pay the beneficiary from documentation you [already] have,” Dailey said.

Interdepartmental collaboration is the key to any successful policy, Ernsting added. “How do you notify other departments? Do you send a mass email? Collaborate with all departments [and] put a process in place,” she said. “When it happens, you’ll be the best partner to that family that you can be.”

Withholding Requirements

Payroll professionals must ensure compliance with federal and local requirements for proper withholding of a deceased employee’s final paycheck. Employers should report any payments made to a deceased employee of over $600 on Form 1099. Dailey warned employers against using Form 1099-MISC to report these payments, reflecting a 2020 update by the IRS. “Make sure your Forms W-2 are also up to date,” she said.

State withholding requirements vary, and many states lack a cohesive set of regulations regarding the taxation of final wages. “Understand residential state laws,” Dailey cautioned. Some states set maximum distribution limits, which may limit an employer’s ability to pay out all the wages owed. In these instances, Dailey advised employers to “hold [the payment] until you receive documentation from the courts” clearly designating a beneficiary. She also encouraged collaboration with the employer’s legal team, “you always want legal in your back pocket.”

The policy should also address whether regular qualified deductions will be withheld for an employee’s final paycheck. “This will all depend on how the [policy] is written,” Dailey said.

“If the employee is not alive at the time of payday, you must reverse [the payment],” she said. “Even if it was already earned, the employee must be alive at payday.” If an employee passes before cashing the check, the employer should “reissue the check to the employee’s designated beneficiary and report it on the W-2,” Dailey said.

“Keep a checklist and written documentation” said Ernsting. And above all, “the policy should be designed with compassion in mind.”