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Texas Payroll/Personnel Resource

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Payments to Estates of Deceased Employees
Entitlement to Payment, Taxes and Deduction Considerations

Entitlement to Payment

If the deceased employee completed at least six months of continuous state employment, the estate or spouse of a deceased state employee is entitled to:

  • The balance of the deceased employee’s accumulated vacation leave.
    – and –
  • One-half of the employee’s sick leave (up to 336 hours).

The estate or spouse of the deceased state employee who completed less than six months of continuous service may be paid other types of compensation, but will not be paid for any accumulated leave.

Special Tax Considerations

When a state employee dies, the sick leave portion of a lump-sum payment of accrued vacation and sick leave is not subject to:

  • Federal income tax (FIT) withholding.
    – or –
  • Withholding under the Federal Insurance Contributions Act (FICA).

The vacation leave portion of a lump-sum payment of accrued vacation leave and sick leave at the death of a state employee is not subject to FIT withholding, but is subject to withholding under FICA if paid in the same year as death.

If the payment occurs after the calendar year of the employee’s death, the lump-sum payment is not subject to FIT or FICA.

Refer to Internal Revenue Service Form W-2 Instructions PDF for tax information.

Deduction Considerations

A lump-sum payment for accrued vacation and sick leave at the death of a state employee is not subject to deductions for employee retirement contributions to the:

  • Optional Retirement Program.
  • Teacher Retirement System.
    – or –
  • Employees Retirement System.

Sources

Texas Estates Code Section 453.004; Administrative Rule 5.44; Texas Government Code Section 661.031–.038; IRS Publication 15 (Circular E) PDF, Employee’s Tax Guide; IRS Publication 15-A PDF, Employer’s Supplemental Tax Guide.