Tax & Accounting Blog

Requirements for Paying Terminated Employees

CS Professional Suite Accounting & Auditing Solutions, CS Professional Suite Payroll Solutions June 7, 2013

Employee turnover is a fact of life for every employer. And when an employee leaves, it’s important to keep in mind that different types of employee termination have different payment requirements.

There are three types of terminated employees:

  1. Voluntary: The employee quit
  2. Involuntary: The employee was laid off or fired
  3. The employee is deceased

The requirements for each type of termination vary by state.

Voluntary Terminations

Many companies assume that all voluntary terminations can be paid with the normal pay cycle, but that’s not always the case. For example:

  • California requires that voluntary terminations be paid within 72 hours of resignation.
  • New Hampshire requires payment within 72 hours of resignation if the employee gave notice.
  • Oregon requires immediate payment if the employer is given 48 hours notice.
  • Washington, DC requires that employees be paid on the next regular pay day or within 7 days of resignation, whichever comes first.
  • Wyoming requires payment within 5 working days of resignation.

Other states vary widely in their requirements; you’ll find a complete guide to voluntary termination requirements here.

Involuntary Terminations

Involuntary terminations require the employee to be paid quickly. In fact the following states require payment the same day as termination: California, Colorado, Illinois, Massachusetts, Missouri, and Montana.

Other states vary widely in their requirements; you’ll find a complete guide to involuntary termination requirements here.

Deceased Employees

Payments made on behalf of deceased employees can be very complicated. They require the employer to do a thorough investigation of state requirements, which dictate the maximum payment and who must receive it. For example, Georgia and Hawaii limit the maximum payment to $2500 and $2000, respectively. Massachusetts limits payment on behalf of a deceased employee to $100. New Hampshire limits the payment to $500. Rhode Island limits the payment to $150.

Other states vary widely in their requirements; you’ll find a complete guide to deceased employee termination requirements here.

You’ll also need to take federal W-2 and 1099 considerations into account when dealing with employee terminations. For example, FICA tax is to be deducted from payments on behalf of the deceased only in the current calendar year. Any future calendar-year payments are not subject to FICA tax. Also, all payments after death must be reported on 1099 Box 3 (FICA tax, if applicable, is to be reported on a W-2). The recipient of the payment is usually determined by court order or by state provision; many states have specific rules and orders of survivors.

Federal and state websites are valuable sources of information on paying terminated employees, and Thomson Reuters Checkpoint is an excellent reference as well.

For more payroll tips, resources, and insight, visit The Payroll Report, the monthly payroll blog from Jim Paille, director of operations at our myPay Solutions payroll service.