Writing employees checks is one way you can pay them their wages. But if an employee takes too long to deposit their paycheck, you have to deal with the consequences. There are a few things you might have to do when paychecks are outstanding checks.
What are outstanding checks?
Outstanding checks are checks that have not been deposited or cashed by the recipient. Because the recipient has not cashed the check, the payor still has the money in their account. The payor still owes the payee money, making the payment a liability.
You can have outstanding checks for a number of reasons. When you pay an employee with a paycheck, they do not have to cash it right away. They might hang onto the check until they absolutely need to cash it. Or, a paycheck could get lost in the mail.
Do paychecks expire?
Like personal checks, paychecks can expire if they are outstanding for a certain amount of time.
When does a paycheck expire? The expiration period for paychecks varies from state to state. Generally, paychecks expire after six months. If an employee tries to cash an expired paycheck, their bank can choose whether to cash it or not.
If a paycheck has been unclaimed for a long period of time, the payor must hand over the funds to the state in a process known as escheatment.
How to handle outstanding paychecks
Having outstanding or unclaimed checks doesn’t mean you’re off the hook. You need to make an effort to take care of the liability.
How you treat outstanding paychecks depends on several factors. Ask yourself the following questions before proceeding:
- Does the employee still work for you?
- Is the paycheck expired?
- When does your state require you to report unclaimed paychecks?
Using the questions as guidelines, take a look at what you need to do below.
1. Does the employee still work for you?
As an employer, you need to make an effort to contact your employee or former employee about the outstanding paycheck.
If the employee still works for you, getting in touch with them should be easy because you have their current contact information. If the employee was terminated, use their most recent contact information to call them or send a written notice.
Document each attempt that you make to tell the employee or former employee about their uncashed paycheck. Make sure to keep accurate payroll records of each attempt.
2. Is the paycheck expired?
If the paycheck is expired, the employee might still be able to cash it, depending on their bank’s rules. If the employee is unable to cash an expired paycheck, you can issue a new check.
3. When does your state require you to report unclaimed paychecks?
If a paycheck goes unclaimed for a certain period of time, you need to file and report it to your state. Each state determines when funds are escheatable. Generally, if a paycheck is unclaimed for one to five years, you will need to hand over the amount of the check to your state.
Once an unclaimed paycheck is escheated, the employee might be able to apply to the state to get the funds back.
For more information, check with your state about its escheatment laws.
Combating problems with outstanding checks
Outstanding checks can wreak havoc on your time, the accuracy of your records, and even your finances.
Here are some problems outstanding checks can cause, as well as tips for combating these issues:
- Bank account overdrafts
- Discrepancies between your accounting books and bank account
- Failing to report unclaimed paychecks
- Wasted time
When an employee takes too long to cash a paycheck, you might face bank account overdrafts. Forgetting about your uncashed liability can lead you to spend more money than you actually have. One way to combat potential bank overdrafts is by opening a separate payroll account. By separating payroll funds from general business funds, you can make sure you won’t touch extra money in your payroll account that is meant for paychecks.
Outstanding checks can also create discrepancies between your accounting books and bank account. Your bank account will show a higher balance than your books. To fix this, you will need to reconcile your bank account with your accounting books. After bank statement reconciliation, adjust your bank statement balance.
You might also fail to report unclaimed paychecks to your state. If you don’t report the unclaimed property to your state, you could face penalties. Make sure you establish procedures for dealing with unclaimed paychecks before these issues come up.
Dealing with outstanding checks can also be time consuming. You need to track down the employee or former employee to get them to cash their paycheck. Instead, you might consider paying employees via direct deposit. Direct deposit can eliminate the whole ordeal of outstanding or unclaimed paychecks. And in some states, you can make direct deposit mandatory.
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This article has been updated from its original publication date of May 14, 2018.
This is not intended as legal advice; for more information, please click here.