Learn how to create final paychecks in Online Payroll.

Do you need to create a final paycheck for an employee leaving your company? Online Payroll lets you create final paychecks for employees for either severance or termination. We'll show you how to do both.

Understanding severance pay

Severance pay is a payment package offered to employees based on certain length of service and salary requirements.

  • As per Publication 525, severance pay must be paid and reported as income. And thus, subject to federal withholding, social security, medicare, and FUTA taxes.
  • Since severance pay must be treated as supplemental wages, federal withholding depends on whether it was identified as separate from the regular wages.
  • If the employee is exempt from federal income tax on the W-4, the employer should not withhold anything.

There are two ways to create a severance paycheck:

Option 1: Create severance pay as bonus only paychecks or commission only paychecks.
This option lets you use the supplemental withholding tax rates. You won't be able to enter vacation or sick pay hours using this option. However, you can calculate it manually and include it in the bonus/commission amount.

  • 22% - The flat rate on supplemental wages of 1 million dollars.
  • 37% - Mandatory rate for compensation in excess of 1 million dollars.

Option 2: Create severance pay as a regular paycheck or unscheduled paycheck. With this option, you can add vacation and sick pay hours but the option to choose which supplemental tax rate to use will not be available.

Create a bonus check as severance

To create a bonus paycheck to use for severance follow these steps.

Intuit Online Payroll

  1. Add an other earning pay type and name it Severance pay.
  2. Select the Payday tab. Then select a pay schedule.
  3. Choose a pay period and a pay date.
  4. Select the employee you want to pay.
    • If the employee is already paid on the selected period, select create 2nd check.
    • If the employee is not yet paid on the selected period, select the Check Details icon.
  5. A window will pop up:
    • Zero out the hours worked if you don’t want to include their regular pay
    • Enter severance pay amount
    • Add vacation or sick pay hours
    • Select the Federal withholding amount checkbox to override amount. Enter the withholding amount calculated based on supplemental tax rates (22% or 37%).
  6. Select Create. Then select Approve Paychecks.

Intuit Online Full Service Payroll

  1. Add other earning pay type. And rename it as Severance pay.
  2. Select the Payday tab. Then select a pay schedule.
  3. Select a pay date.
  4. Select the employee you want to pay.
  5. If the employee has already been paid on the selected period, you will need to create an unscheduled check.
  6. If the pay period you need is not the current pay period, you will need to create an unscheduled check.
  7. A window will pop up:
    • Zero out the hours worked if you don’t want to include their regular pay
    • Enter severance pay amount
    • Add vacation or sick pay hours

QuickBooks Online Payroll Enhanced/QuickBooks Online Full Service Payroll

  1. Add an other earning pay type. . And rename it as Severance pay.
  2. From the left menu, select Workers, then Employees.
  3. Select Run Payroll.
  4. Select a pay schedule. Then select the employee you want to pay.
  5. Enter severance pay amount and vacation/sick pay hours.
  6. Select the salary amount and then choose Skip salary this time only. Or leave the total hours field blank if you don’t want to include their regular pay.
  7. Select edit (pencil) icon beside the total pay amount.
  8. Override Federal Income Tax. Enter the withholding amount calculated based on supplemental tax rates (22% or 37%). Call support for QuickBooks Online Full Service Payroll.
  9. Select Preview payroll. Then select Submit payroll and Finish Payroll.

Create a termination paycheck

If you terminate an employee for any reason, you must pay them for all time owed. If the employee has a multiple hourly rate, overtime pay must be based on the employee's regular hourly rate when the payment is made.

Termination checks are governed by a separate set of state rules. This accounts for when employees must be paid when they separate from employment because of discharge, layoff, or resignation. Reach out to your state agency for your state's requirements. For a list of states and their phone numbers, review our Payroll Tax Compliance page.

Creating a termination paycheck is the same as creating a regular paycheck.

After creating a final paycheck, you may change the employee’s status to Terminated. To do this, see Terminate, deactivate, or delete an employee.