Introduction

Handling a terminated employee’s final paycheck is one of the most compliance-sensitive payroll tasks an employer faces. Federal law sets baseline payroll tax responsibilities, but state wage-and-hour rules determine when the final pay is due and which forms of accrued pay (like vacation) must be paid out. Getting it wrong risks wage claims, penalties, and damaged employer-employee relations.

Legal framework: federal vs. state responsibilities

  • Federal: The Fair Labor Standards Act (FLSA) establishes minimum wage, overtime, and recordkeeping obligations but does not set when a final paycheck must be delivered. Employers must still withhold federal income tax, Social Security, and Medicare from wages, deposit payroll taxes, and file required returns (see IRS Publication 15 and the IRS employment taxes pages for current guidance). IRS — Employer’s Tax Guide (Pub. 15) and IRS — Employment Taxes.
  • State: States set timing rules for final pay, payout requirements for accrued vacation or paid time off (PTO), and limits on permissible deductions. For example, California requires immediate payment of final wages when an employee is discharged; other states permit payment on the next scheduled payday. Always confirm obligations with your state labor department.

What must be included in a final paycheck

At minimum, a final paycheck should include:

  • All straight-time and overtime hours worked up to the termination date.
  • Pay for any commissions or piece-rate earnings earned before termination.
  • Accrued and payable vacation or PTO if state law or company policy requires payout.
  • Any separation pay or contractual severance required by agreement.

Do not deduct items from the final check unless the deduction is permitted by law or supported by a signed, lawful agreement (e.g., wage advances with employee consent and permitted by state law).

Tax withholding and payroll taxes on final wages

  • Federal income tax: Withhold federal income tax on the final wages using the employee’s current Form W-4 and normal payroll withholding procedures. If the employer issues supplemental pay (for example, a lump-sum separation payment), follow IRS guidance for supplemental wages — either the aggregate or percentage method described in Publication 15.
  • FICA (Social Security and Medicare): Withhold and match FICA taxes on all taxable wages in the final paycheck.
  • Federal and state unemployment taxes: Employers must still report wages and pay FUTA and applicable state unemployment contributions based on wages paid.
  • Deposits and reporting: Continue to follow your normal deposit schedule for federal payroll taxes (e.g., the EFTPS schedule) and report wages on Form 941 (quarterly) and Form W-2 (annual). See IRS forms and filing instructions for current due dates.

Handling garnishments, levies, and court orders

Employers must honor legally valid garnishments and levies that apply to final wages. Common obligations include:

  • Child support and family-support garnishments (state-administered).
  • Federal tax levies (IRS) — employers who receive an IRS levy (Letter 668(W)) must withhold amounts per the notice until released. See the IRS levy rules for employer responsibilities.
  • Creditor garnishments and wage assignments — these are governed by state law; some states limit the amounts that can be taken and require specific procedures.

For practical guidance on employer response to tax levies and garnishments, see our articles: “What to Do If the IRS Garnishes Wages or Bank Accounts” and “Options When a Third Party Garnishes Wages for Tax Debt”. Employers should also review IRS materials such as the notice for employers, IRS Letter 668(W): Notice of Levy on Wages (internal link).

Timing: when must the final paycheck be issued?

Timing is state-dependent:

  • Immediate payment: Some states (notably California) require that terminated employees receive their final wages immediately at termination.
  • Next scheduled payday: Other states allow the final wages to be paid on the next regular payday.

Always check your state labor agency for exact timing rules and whether certain payments (like accrued vacation) must be paid separately or included.

Practical payroll steps for processing a final paycheck

  1. Freeze the employee’s time records on termination date and confirm all hours, overtime, commissions, and bonuses earned through that date.
  2. Determine whether accrued vacation/PTO or other benefits are payable under state law or company policy.
  3. Check for active garnishments, tax levies, or court-ordered deductions and calculate the required withholding before issuing funds.
  4. Apply federal and state income tax withholding rules and FICA tax withholding as you would for any payroll run. For supplemental separation pay, follow IRS methods for calculating withholding (see Pub. 15).
  5. Generate an itemized final pay stub showing gross wages, tax withholdings, other deductions, and net pay. Retain payroll records for the required period.
  6. Deposit withheld taxes and report wages on your regular tax filings (Form 941, Form 940, state unemployment filings).

Sample timeline

  • Day 0 (termination): HR/manager confirms termination and instructs payroll. If state law requires immediate payment, payroll issues final check that day or on the same business day.
  • Day 1–3: Payroll reconciles hours, PTO, commissions, and garnishments; generates pay stub and processes direct deposit or physical check.
  • Within normal deposit window: Employer deposits withheld taxes per its deposit schedule and reports wages on regular filings.
  • By Jan 31 (following tax year end): Employer issues Form W-2 reflecting total wages paid that year including final wages.

Common employer mistakes and how to avoid them

  • Miscalculating overtime in the final pay: Review time records carefully and ensure overtime rates are applied through the termination date.
  • Failing to process garnishments or levies: Audit active deductions before final pay to avoid being served with collection notices later.
  • Incorrectly withholding for supplemental payments: Use IRS guidance for supplemental wages to avoid under- or over-withholding.
  • Assuming vacation/pTO payout rules are the same across states: Maintain a state-by-state compliance checklist and update it with legal counsel or payroll providers.

Tips from practice

In my work with HR teams and small businesses, I’ve found these steps reduce disputes and audits:

  • Maintain a written termination checklist that ties HR decisions to payroll actions.
  • Use an up-to-date payroll service or attorney-reviewed payroll policy to handle garnishments and state-specific payout timing.
  • Keep transparent documentation and a clear final pay stub — employees are less likely to question an itemized, well-documented final pay.

Recordkeeping and reporting

Keep payroll records (timecards, pay stubs, wage calculations, garnishment notices) for the period required by federal and state law. Federal law requires keeping payroll records for at least four years, and some states require longer retention.

When to get help

Consult a labor attorney or an experienced payroll provider when:

  • You’re unsure whether accrued leave must be paid under state law.
  • You’ve received a federal or state levy and need help interpreting the notice.
  • You face unusual compensation arrangements (deferred compensation, equity payouts, complex bonuses).

For employer-facing guidance on levies and wage garnishments, review our related resources: “What to Do If the IRS Garnishes Wages or Bank Accounts” and “Options When a Third Party Garnishes Wages for Tax Debt”.

Authoritative resources

Professional disclaimer

This article is educational and does not constitute legal or tax advice. Employer obligations vary by state and by the specific facts of a termination. Consult a licensed attorney, CPA, or your state labor agency for advice tailored to your situation.