by Margaret Lohmann

Question: We have an employee who recently passed away. He wasn’t married, didn’t have a will, and didn’t have company life insurance or death benefits. How do we handle his final paycheck? Do we continue with our regular payroll procedures, should we wait for the beneficiary for his estate to be identified, or something else?

Answer:State law typically dictates how to process a deceased employee’s final paycheck. You should generally wait to pay wages owed, however, until a court appoints a beneficiary or personal representative for the employee’s estate. This helps avoid claims for improper distribution of assets.

State laws usually include provisions for payment of a deceased employee’s wages regarding (1) the maximum amount payable, (2) to whom wages are payable, and (3) the conditions of payment. In West Virginia, for example, in the event of an employee’s death, up to $800 should be paid directly to the decedent’s next-of-kin outside of probate proceedings. Any wages still owed beyond the $800 payment made to the decedent’s next-of-kin should then be paid to the decedent’s estate.

In addition to the deceased employee’s wages, any vacation or other accrued paid time off they accumulated may need to be paid out. Payment for such benefits should be paid according to state law. When state law is silent regarding how such time should be paid, your policies from your company handbook or manual regarding payment of this time governs the manner of such payment.

Appropriate withholdings from the deceased employee’s final paycheck depend on the payment’s timing relative to the timing of the employee’s death. Before making payments, you should submit a W-9 Form to obtain accurate information about the employee’s beneficiary or estate and ensure accurate reporting about the payments for a Form 1099-MISC. Generally, when an employer pays the final outstanding wages in the same year as the employee’s death, only FICA and federal unemployment taxes should be withheld. Federal income tax doesn’t need to be withheld from final pay. If wages are paid in the year following the employee’s death, these wages aren’t subject to FICA, federal unemployment, or federal income tax withholding.

Regardless of the year in which wages are paid, the employee’s survivor or estate should receive a Form 1099-MISC with “other income” listed in Box 3 for the gross wage amount. Although many states follow federal withholding rules, you should always confirm any applicable state requirements.

Bottom line. To avoid premature payments to incorrect parties, wait to make payment until a beneficiary or a representative for the employee’s estate is designated. Once this designation is made, consult state law for any provisions regarding conditions of payment. Also ensure any withholdings are correct based on state law requirements and whether the payment is made in the same year as the deceased employee’s passing.

Margaret Lohmann is an associate at Steptoe & Johnson PLLC in Bridgeport, West Virginia. A former Steptoe & Johnson summer associate, Maggie currently focuses her practice on employment litigation. She can be reached at 304-933-8344 or maggie.lohmann@steptoe-johnson.com.