How to Process the Final Pay for Deceased Employees to a Beneficiary
No one wants to learn about an employee's death, but when you do, have a plan in place for how you and your company will treat it. This plan should include a list of forms you need to send the employee's beneficiary, family or executor, and the steps you must take before and after issuing the employee's final paycheck. State laws tend to follow federal guidelines, but check with your state to make sure.
Include a designation of beneficiary form in the paperwork of all newly hired employees. By completing this form, an employee makes known who should receive her final paycheck in the event she dies while employed there. Remind employees each year to review the form to ensure its information is current and remains in line with the employee's wishes. If your employee does not designate a beneficiary, you can issue the final paycheck to an executor or next of kin, provided they have the necessary paperwork such as an original letter of testamentary or administration, a certified copy of the death certificate and the applicable W-9 Form.
After learning of an employee's death, prepare and send a packet of information to the employee's family and/or designation of beneficiary. This packet should include information about any benefits, the forms that need to be completed, postage-paid return envelopes if necessary, contact information and information about any wages still due and when they will be paid. Immediately notify the payroll department of the employee's death. This department will need to freeze the employee's wages and stop any direct deposit in place until it receives necessary paperwork, which includes a death certificate and a form W-9 for beneficiary or estate. The payroll department should also calculate the amount of the final paycheck, which should include wages and other types of pay such as vacation time or accrued sick time, if applicable. If you use a payroll processing service, you might need to give it a certified copy of the employee's death certificate prior to processing the employee's final paycheck. These steps are important since a bank might freeze the deceased's bank account, which could affect receipt of the last paycheck.
If the employee has received but not yet cashed a paycheck, you should stop payment on the check and issue a new check for that amount to the employee's beneficiary or estate. If the employee is owed a paycheck for outstanding earnings, issue it to the employee's beneficiary or estate. Check state laws governing any special conditions that must be met before you issue the final paycheck.
For wages owed and paid out during the same calendar year as the employee's death, you must include the wages in the employee's Form W-2 and also report the amount of the final paycheck in Form 1099-MISC in the name of the beneficiary or executor. If the wages are payable after the year in which the employee dies, do not issue a W-2 in the employee's name for the year in which you issue the final paycheck. Instead, issue the beneficiary or executor a Form 1099-MISC that includes the amount of the final paycheck. You can get copies of these forms from the IRS, which also can offer additional guidance on completing and issuing these forms.