A wrong decision by an employer on how to handle his unclaimed or un-cashed payroll checks can result in serious trouble for an employer. Prior to implementing a policy on how your company handles these types of checks, there are several issues to consider:

The State Law. Every state has escheats laws that affect unclaimed property. In general the laws require that the uncollected funds (payroll checks) be turned over to the state after a designated period. The state holds the items for the owner or heirs until a claim is filed to collect the property. If the unclaimed check is voided and, in essence, becomes a redeposit to the employers account and at a later date the funds are not available to pay the employee or to submit to the state the employer and officers could find themselves under a breach of fiduciary responsibility or theft if the facts support criminal intent. Once the check is issued to pay the employee for his services, the money is no longer the employers.

Under no circumstances should the funds be returned to the general checking account W-2 wages. Even if the employee never claims the money, he/she deserves credit for the Social Security and Medicare wages earned as well as for unemployment purposes. Even though the employee did not actually receive them, the pay is considered paid and constructively received by the employee during the tax year. Considering the issues involved you company policy regarding these unclaimed or un-cashed checks should follow these guidelines:

After a reasonable time, void the check and move the funds to an escrow account pending claim by the employee or for submission to the state.

Pay all taxes that are due on the unclaimed wages during your regular deposit period.

You must report these wages on the W-2 form and pay all taxes that are due for that year.

You must report these wages on the W-2 form and pay all taxes that are due for that year.

Issues like these can be very complicated and it is a good idea to have professionals in payroll and HR to consult.