A Few Interesting Payroll ​Related Items

Handling employees is always a challenging situation. And while there are many issues that you will encounter, here are a few interesting situations.

Employee Terminates, Files for Unemployment

This is a scenario that a business owner experienced. His employee decides to voluntarily terminate his employment with him. Upon leaving he asked the owner if his final check could be disbursed to him now. In one last act of kindness, the owner grants his request. The owner then receives a correspondence from the Hawaii Department of Labor stating that this ex-employee has filed an unemployment claim saying he was fired.

The owner replied that he voluntarily left his employment. However, by paying him within 24 hours of termination, the Department tells him that’s the rule when someone is fired. Since he followed that rule, they conclude that the owner fired him and grant the ex-employee unemployment benefits. If you run into this scenario, tell your ex-employee that they will get paid when the normal payroll period ends.

Withholding Medical Insurance From Separated Employee

An employee separates from your business before the 15th of the month. But you’ve already paid his medical insurance for that month. You are allowed (in Hawaii) to charge back as a deduction ½ of medical insurance premium on his final paycheck should you wish to do so. See HRS 393-13.

Withholding proper amount of tax from employee

You hire a new employee who fills out the HW-4 withholding certificate saying he is exempt from taxes. What position do you take? The Hawaii Department of Taxation has issued Tax Information Release 95-4 to provide guidance for employers on what an employee can claim.

The employer is required to determine the proper amount of withholding from each employee. Should the employee refuse to provide documentation as to why he is exempt, the employer is required to use single zero. Should the employer honor the employee’s certificate and fails to deduct taxes, the employer will be required to pay the employee’s share of taxes. See HRS 235-64.

Employer liable for taxes despite payroll firm’s embezzlement

Many businesses engage the services of payroll processing companies to handle all their payroll needs. They provide the convenience of not only filing all employment reports, but also withdraw from your account all necessary funds to cover all payroll costs. The biggest liability issue is when the payroll processing company fails to remit amounts to the taxing authorities after debiting monies from client accounts.

Even though you paid your payroll processing firm the taxes withheld from your employees, you are still responsible if those funds are not turned over to the taxing authorities. In a case that highlights this issue, we look at a court case Pediatric Affiliates P. A. (CA 3 4/16/2007) 97 AFTR 2d 2006-1329.

Pediatric Affiliates, P. A. was a New Jersey professional corporation that hired PAL Data to service its payroll accounting and tax needs. Unknown to Pediatric the founder of PAL (Hirsch) embezzled the tax payments that Pediatric and other clients transferred to PAL. Hirsh would prepare and send to Pediatric a tax form that reflected Pediatric’s actual tax liability.

Pediatric then would transfer the money in the amount of its tax liability to PAL. Hirsch, however, would also prepare a tax form that reflected an understated tax liability. He sent the understated form and amount to the IRS, and invested the difference between the amount he received from Pediatric and the amount sent to the IRS in a personal hedge fund.

Hirsch pled guilty to wire fraud and tax evasion, was assessed monetary penalties and was sentenced to a prison term. Pediatric also brought an action against PAL and Hirsh for monetary damages and recovered part of the funds that were embezzled.

The IRS sent notices of intent to levy on its assets for the taxes Pediatric owed from 1999 thru the first quarter of 2000 due to Hirsh’s underpayment. In response, Pediatric brought an action in District Court, seeking a redetermination of the IRS’s collection action. Pediatric argued that it was not responsible for the tax and interest because: (1) it paid the taxes owed to PAL; (2) it was not responsible for Hirsh’s subsequent embezzlement of those funds; and (3) the government was judicially stopped from recovering payroll taxes from Pediatric because the government already had a “recovery” of the taxes in Hirsh’s conviction and incarceration.

The district court rejected all of Pediatric’s arguments. It held that reliance on an agent does not constitute cause even when the agent embezzles a company’s tax payments. Reliance on an agent or particular employee to properly pay a company’s taxes is not reasonable cause because the agent’s or employee’s failure to do so does not render the company unable to fulfill its tax obligations.

There are several things that you as a business can do to monitor the activities of your payroll service. First is obtaining copies, as they are prepared, of all government filings prepared by the payroll processing company. Make sure your address is used so if any deficiency notices are sent, you will receive them.

Match up the disbursements from your account to that on the tax filings. You can also go to the IRS website to view all payments posted to your account. And finally request a certificate of insurance from the service provider naming you as additional insured to cover you in the event there is a misappropriation of funds.