How to Run a Final Paycheck in QuickBooks Online

Processing an employee’s final paycheck correctly is more than just good bookkeeping; it’s a legal necessity that protects your business. Unlike a regular payroll run, a final check involves specific rules for timing and an accurate calculation of all owed wages, including accrued vacation time and severance. This guide will walk you through the entire process, covering key legal considerations before you start and providing a detailed, step-by-step tutorial on how to run a final paycheck in QuickBooks Online.

Before Running the Final Paycheck: Essential Preparation

Jumping directly into your payroll software without proper preparation is a recipe for costly mistakes. An incorrect final paycheck can lead to wage claims, state penalties, and legal headaches. Before you log in to QuickBooks Online Payroll, gather the following information and confirm these key details.

Understand Your State's Final Pay Laws

The single most important factor in processing a final paycheck is understanding your state’s specific requirements. Federal law (the Fair Labor Standards Act, or FLSA) doesn't dictate a specific timeline for final pay, but most states do, and they vary significantly. State laws determine when the final check is due and what must be included.

• For voluntary termination (employee quits): Some states allow you to pay the employee on the next scheduled payday. Others, like California, require payment within 72 hours if the employee gives less than 72 hours' notice.
• For involuntary termination (you fire the employee): Many states require immediate payment on the last day of employment. California, for example, demands that the check be given to the employee on their last day. Delaying this can result in "waiting time penalties," where you owe the employee a full day's wages for each day the final payment is late.

Ignorance of these laws is not a defense. Look up your state’s department of labor website to find the specific statutes governing final pay. This will dictate your entire timeline.

Calculate All Hours Worked

Ensure you have the employee's final timesheet. Every minute of work must be accounted for, including any time worked on their last day. For salaried exempt employees, you’ll typically pay them for the full last pay period they worked, unless your company policy and state law allow for pro-rata pay.

Address Accrued Paid Time Off (PTO)

Your state and company policy determine whether you must pay out unused vacation time. In states like California, Colorado, and Illinois, accrued vacation time is considered earned wages and must be paid out upon termination. In other states, the payout requirement depends on your written company policy. If your employee handbook states you will pay it out, you are legally obligated to do so. Sick time is a different matter and is less frequently required to be paid out, but again, check your state and local laws.

To calculate this in QuickBooks Online, run a Vacation and Sick Leave report to get the employee's current balance before processing the last check.

Factor in Final Deductions and Garnishments

Final paychecks are subject to the same standard deductions as regular pay: federal and state taxes, Social Security, and Medicare. Beyond that, be cautious.

• Voluntary Deductions: Confirm amounts for health insurance premiums, retirement plan contributions (like a 401(k)), and other benefits contributions for the final pay period.
• Outstanding Debts to the Company: You cannot simply deduct the value of unreturned company property (like a laptop) or a cash advance from the employee’s final check. Many states have specific rules protecting an employee's final wages. Generally, you need prior written authorization from the employee to make such deductions. Without it, you could face a wage claim.
• Garnishments: If the employee has a wage garnishment, it must be included in the final check according to the court order.

Check for Severance or Contractual Payouts

Is there an employment contract or severance agreement in place? If so, you must include the agreed-upon severance pay. Severance pay is considered a supplemental wage by the IRS and has specific tax withholding rules. QuickBooks Online can handle this, but you need to know the amount ahead of time.

Step-by-Step: How to Run a Final Paycheck in QuickBooks Online

Once you’ve done your legal homework and gathered all the necessary numbers, running the check in QuickBooks Online Payroll is fairly straightforward. QBO offers a specific workflow for termination checks to ensure you cover all your bases.

Here’s the process for running a special payroll for a terminated employee. Using this "termination check" feature is better than just terminating them from the employee list, as it ensures all final dates and amounts are recorded correctly for year-end tax reporting.

Step 1: Terminate the Employee in the System

Before you run the final check, you need to tell QuickBooks that the employee is being terminated. This sets the stage for the payroll system to calculate year-to-date totals correctly.

1. Navigate to the Payroll section, then select Employees.
2. Click on the name of the employee you are terminating.
3. Next to their employment status, click Edit.
4. From the Status dropdown menu, select Terminated. (You may also see options like "Resigned" or "Dismissed"; choose the most appropriate one).
5. Enter the Termination Date. This date is critical for compliance and paperwork, so be sure it is the employee's true last day of work.
6. Click Save.

This does not run their last check; it only updates their status. Now you are ready to create the final paycheck itself.

Step 2: Start an Off-Cycle, Final Payroll Run

Because the timing is an HR and legal matter, not your typical payroll schedule, you'll run what QuickBooks calls an "off-cycle" or "special" payroll run.

1. From the Employees list, look for the dropdown menu at the top right of your screen, typically labeled Run payroll. Click it.
2. A short list of payroll types will appear. Do not select your regular payroll cycle. Instead, choose the option for Termination check, Special payroll run, or Off-cycle payroll (the phrasing may vary slightly depending on your QBO Payroll subscription).
3. The system will now ask you to confirm the pay period end date and the check date.
   • Pay Period End Date: This should be the employee's termination date.
   • Payday: This should be the date you are actually issuing the payment, which, as discussed, must comply with your state’s law.
4. Select the employee you terminated from the list of employees eligible for this special payroll. Click Continue.

Step 3: Enter Final Pay Details

This is where you'll input all the numbers you gathered during your preparation phase.

1. Regular Hours: Enter the final regular and overtime hours the employee worked in their last pay period.
2. Accrued time payout: You should see a line for vacation or PTO payout. QuickBooks will auto-populate the available balance if you have been tracking it in the system. Double-check that this matches your records and company policy. You can manually override this number if needed. The same applies to sick time if your state or policy requires it to be paid out.
3. Other Earnings: If you are paying severance, click Add earnings or a similar option to add this as a separate line item. You must classify it correctly (e.g., as “Severance Pay”) so QuickBooks can apply the proper tax withholdings. Do the same for any commissions or bonuses owed.
4. Memo: It's a good practice to add a note in the Memo field, such as "Final Paycheck - [Termination Date]". This helps with internal record-keeping.

Step 4: Review and Submit the Final Paycheck

Before you finalize, take a moment to carefully review the entire check. QuickBooks Online will show you a comprehensive preview, including:

• Total gross pay.
• Employee tax withholdings.
• Deductions for benefits or garnishments.
• Your employer tax contributions.
• The final net pay amount.

Compare these numbers against your manual calculations to ensure everything is correct. Check the pay date a final time. If you spot an error, click back and make the necessary corrections. Once you are confident that everything is 100% accurate, click Submit Payroll.

QuickBooks will now process the final payment. If you use direct deposit, remember to check the processing deadlines to ensure the funds arrive on the state-mandated date. If you issue a physical check, print it immediately along with the final pay stub.

After the Check is Run: Next Steps

Your work isn't done quite yet. Finalizing an employee's separation involves a few administrative tasks to ensure clean records and prevent future issues.

• Provide the Final Pay Stub: It is legally required to provide a pay stub detailing all earnings, deductions, and withholdings with the final check.
• COBRA and Benefits Information: You are required to provide departing employees with information about continuing their health insurance coverage under COBRA, as well as information about the status of their 401(k) or other retirement plans.
• Keep Records: Retain all records related to the employee's final pay, including timesheets, leave balances, and payroll registers, for at least three to four years, depending on federal and state requirements. QuickBooks securely stores these payroll records for you.

Final Thoughts

Running a final paycheck in QuickBooks Online is a methodical process that starts with diligent preparation and understanding of your legal obligations. By accurately calculating final wages, PTO, and other payouts and following the specific workflow within the software, you ensure compliance and a smooth offboarding experience for the parting employee.

The complexities of state-specific final pay rules—especially for multi-state employers—and the tax treatment of severance can create uncertainty. Instead of spending hours hunting through state websites and IRS publications, an informed accountant can find the right answer in seconds. With Feather AI, our AI tax research assistant, you can ask plain-language questions like "What are a California employer's waiting time penalties for a late final paycheck?" and get instant answers with citations to the actual state code, protecting both your firm and your clients.