When you dismiss an employee in Gusto — whether they were terminated, laid off, or chose to leave — you may need to run a dismissal payroll to issue their final paycheck. This article walks you through how to run that payroll, what Gusto prorates automatically, and state compliance for the last paycheck.
Pro tip: Gusto handles the math and tax filing on a dismissal payroll. We link to state-specific rules below so you know your deadlines, but we cannot tell you what a specific situation legally requires. For tailored guidance — like whether to offer severance, how to handle disputed pay, or what your separation agreement should say — work with an HR professional or employment attorney.
To pay a dismissed employee, you'll:
Check your state’s final paycheck rules — see Dismissal paycheck requirements by state
Run the dismissal payroll (steps below)
For contractors, see our dismiss or rehire contractors article.
A dismissal payroll is a separate payroll Gusto creates so you can issue an employee's final paycheck outside your regular pay cycle — also called a final payroll or termination payroll.
Before you run the payroll, keep these things in mind:
Some states require you to issue the last paycheck in person. To stay compliant, dismissal payrolls default to check payment. You can change it to direct deposit when running the payroll.
If you already paid the employee on a regular or off-cycle payroll, you can skip the dismissal payroll instead of running it.
To backdate a dismissal, contact us through the Help section of your Gusto account.
Hours tracked in Time tracking will sync to the dismissal payroll automatically.
Dismissal payrolls can be issued by check or direct deposit, depending on your state's rules — see Dismissal paycheck requirements by state.
To run a dismissal payroll, follow these steps:
Click the Pay section and find the Dismissal payroll, or click the notification on your Home page for the dismissal payroll.
The dismissal payroll will appear here after the final day of employment
If the dismissal payroll does not appear here, the employee was set to get their final pay on the company's next regular payroll
Click Run.
If you have multiple bank accounts set up, select which bank account you'd like to process payroll from.
If you do not see this option, see our manage company bank account details article to learn more
View the Prorated payment and enter any amounts for a bonus, severance, reimbursements, or other additional earnings.
Hover over the Prorated amount to see how it was calculated (based on the pay-through date)
You can edit hours to change the prorated amount
If state rules permit, click the caret next to Check to change the payment to Direct deposit
Note: If you pay the employee by direct deposit, Gusto does not have insight into when the direct deposit will hit their bank account. The employee's bank processes the deposit of the actual funds.
Click Add Personal Note to include a message on the employee's paystub.
Click Save and Continue.
On the Time Off screen, unused time off will automatically populate based on how the policy is set up.
See Dismissal paycheck requirements by state for state-specific rules
To also pay out any remaining sick hours, add the amount on this page
Click Save and Continue.
Review the payroll information and click Submit payroll.
If you processed the payment as a check, write the final amount on a check and hand it to your employee.
Your employee will see this paystub in their Gusto account one day after their dismissal pay-through date.
Important: Dismissals cannot be reversed. Make sure you want to end employment and remove the employee from future payrolls before moving forward.
Important: Severance is not automatically taxed at the 22% supplemental rate. To tax severance at the 22% supplemental rate, you need to run it separately as an off-cycle or extra pay payroll and edit the tax rate. Otherwise, the regular withholding rate will be applied.
Deductions on a dismissal payroll — for benefits, 401(k), and severance — work differently than they do on a regular payroll. Here’s what to expect.
Externally managed benefits — apply automatically
Gusto-managed benefits — one full pay period of deductions will always apply
Gusto cannot prorate deductions. For example, if an employee is dismissed on Jan. 15 and benefits continue through Feb. 1, we will not capture the remaining deductions the employee owes for the second half of the month
To apply additional deductions, process the final pay as an off-cycle payroll and choose to apply them
Severance pay — if marked as severance, 401(k) deductions (externally managed or integrated) will not apply
Gusto prorates dismissal pay automatically on dismissal payrolls and final regular payrolls for salaried employees. If you need to calculate a salaried employee’s prorated final pay manually, for example, when paying them on an off-cycle payroll, use the formula below.
To calculate prorated pay, first find the daily rate, then multiply it by the days worked:
Daily rate — annual salary ÷ 260 (workdays in a year)
Prorated pay — daily rate × days worked in the pay period
Example:
Annual salary — $100,000
Daily rate — $100,000 ÷ 260 = $384.62
Worked 3 days → $384.62 × 3 = $1,153.85 (rounded)
Once you calculate their prorated wages, pay them on an off-cycle payroll.
Sometimes you may need to pay an employee after you’ve already processed their dismissal payroll.
To pay a dismissed employee, follow these steps:
In the left menu, click People.
Click the Dismissed tab.
Click the employee's name.
Under Information, click Pay.
Scroll to the Recent paystubs section.
Click Run off-cycle payroll.
Click + Other Earnings.
Enter the work period.
Enter the payment date.
Choose how deductions and contributions should be handled.
Review or edit tax withholding rates.
In the Hours and additional earnings section, click + Other Earnings (legacy view) or Custom Earnings (spreadsheet view).
Scroll down and enter the severance amount in the Severance field. This option only shows if the employee has been dismissed.
Severance pay will not count toward an employee's 401(k) if the plan is managed outside of Gusto or through an integrated provider.
(Optional) Click Add Personal Note to include a message about severance on the paystub.
Click Save and Continue.
Click Submit Payroll.
If you're dismissing an employee who has wage garnishments — including child support orders or Income Withholding for Support (IWO) orders — you have legal reporting requirements beyond running the final payroll. Here's what to know.
Legal requirement: If you dismiss an employee with a garnishment order for any reason, you're required by law to notify the collecting agency immediately. State guidelines vary, but we recommend you contact the agency 5 days after you learn that an employee will end employment or within 5 days after dismissal, whichever happens earlier.
Important: Gusto will debit and remit payment for garnishments on dismissal payrolls for all states except South Carolina.
This form from the U.S. Department of Health and Human Services is accepted as fulfillment of the end-of-employment requirements for some states, but not all. States may require additional information or specific employer action.
Electronic Termination (eTerm) on the Federal Child Support Portal lets you notify the state child support agency electronically when an employee ends employment. If you're not yet registered, you can sign up for the employer's online services, including eTerm, on the Federal Child Support Portal.
If you need to bring back a dismissal payroll (and related Home page notification) that was previously canceled or “completed” in error, follow these steps:
Go to People.
Click the Offboarding tab.
Click the name of the person who needs the dismissal payroll.
Click the three-dot Action menu and choose View checklist.
Select Mark as Incomplete.
Click the three-dot Action menu again.
Choose Update final payroll method.
Select Dismissal payroll.
Click Start.
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