Unclaimed or uncashed payroll checks handled incorrectly by an employer can result in serious trouble for the employer. Prior to implementing a policy on how your company handles these types of checks, there are several issues to consider:
Every state has escheat laws that affect unclaimed or abandoned property. In general the laws require that such property, including the funds from uncashed and/or unclaimed payroll checks, be turned over to the state after a designated period. That period and possibly a minimum amount vary from state to state. The state then holds the items for the owner or heirs until a claim is filed to collect the property.
If an uncashed payroll check is voided the money is then available in the company's payroll checking account. If later 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. If the courts find the actions intentional the court could find criminal intent. Remember once you issue a check for wages to an employee those funds no longer belong to the company in any way. Under no circumstances should the funds from uncashed paychecks be returned to the general checking account.
Even if the employee never claims the money or cashes the payroll check the employee deserves credit on his Social Security and Medicare accounts for wages earned. The wages also need to be reported as paid for unemployment purposes and unemployment tax needs to be paid. Even though the employee did not actually cash the check, the wages are considered to have been paid during the tax year in which the check was dated
The company must report these wages on the 941, 940 and W-2 forms and pay all taxes that are due as if the uncashed unclaimed payroll checks had been cashed on a timely basis. State unemployment reports and taxes will also need to be filed and paid as if the payroll check was cashed.
Your company policy should contain the following items at a minimum:
A method of collecting, reporting and safeguarding unclaimed payroll checks and recording and tracking uncashed payroll checks,
An outline of the steps to be made and the recording of those steps in attempting to contact the employee who has not cashed or not claimed a paycheck,
The specific period of time, which may be prescribed by the State, after which the payroll check will be voided and the monies escrowed pending payment to the employee or the state. The method and place where this will be recorded,
The period of time, which will be prescribed by the state, after which the monies will be forwarded to the state.
The method and place where this payment will be recorded
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Charles J. Read, CPA has been in the payroll, accounting and tax business for 30 years, the last fifteen in private practice.
Mr. Read is the author of “How to Start a New Business.”
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See an excerpt of Mr. Read’s interviews from William Shatners “Heartbeat of America” television show on the web sites linked above.
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