Small Business Payroll in Hawaii: Compliance and Best Practices

Introduction to Hawaii Payroll for Small Businesses

Hawaii's unique regulatory environment presents distinct challenges and responsibilities for small businesses managing payroll. Beyond the standard federal requirements, employers in the Aloha State must navigate a complex web of state-specific mandates, most notably the Hawaii Prepaid Health Care Act (PHCA) and the Temporary Disability Insurance (TDI) law. These programs, while providing valuable protections for employees, add layers of administrative complexity not commonly found in other states. The administration of these labor and tax laws is distributed across several state agencies, primarily the Department of Labor and Industrial Relations (DLIR), with its various specialized divisions, and the Department of Taxation (DOTAX). This division of responsibilities means businesses must interact with multiple distinct offices, each with its own set of forms, reporting deadlines, and specific compliance nuances, thereby increasing the administrative load and the potential for inadvertent oversight.

For small businesses, meticulous compliance with these multifaceted payroll obligations is not merely an administrative task but a critical component of operational integrity and sustainability. Failure to comply can trigger significant financial repercussions, including hefty fines, assessment of back taxes with interest, and other legal actions initiated by both state and federal authorities. Furthermore, accurate and timely payroll administration is fundamental to fostering employee morale, building trust, and supporting retention efforts. Diligent payroll management also safeguards a business's reputation and contributes to its overall stability in a competitive market.

The emphasis on employer-provided or employer-funded benefits, such as Workers' Compensation, TDI, and PHCA, establishes a higher baseline cost of employment in Hawaii compared to states lacking such comprehensive mandates. These legally required contributions represent significant fixed or semi-variable expenses per employee that small businesses must incorporate into their financial planning and pricing strategies from their inception.

The key state agencies involved in Hawaii payroll administration include:

• Hawaii Department of Labor and Industrial Relations (DLIR): This department is the primary state body overseeing a wide range of labor laws. Its responsibilities include the enforcement of wage and hour regulations, administration of the state unemployment insurance program, management of temporary disability insurance and prepaid health care requirements, and oversight of occupational safety and health standards.
• Wage Standards Division (WSD): Specifically tasked with enforcing laws related to minimum wage, overtime compensation, pay frequency, final pay, pay stubs, and child labor.
• Unemployment Insurance Division (UID): Manages the collection of State Unemployment Insurance (SUI) taxes from employers and the payment of unemployment benefits to eligible workers.
• Disability Compensation Division (DCD): Administers the unique state programs for Temporary Disability Insurance (TDI) and the Prepaid Health Care Act (PHCA).
• Hawaii Department of Taxation (DOTAX): This agency is responsible for administering the state's tax laws, including the withholding of state income tax from employee wages and the collection of other business-related taxes such as the General Excise Tax (GET).

Navigating this landscape requires a clear understanding of each agency's role and the specific requirements they impose on employers.

Setting Up Payroll in Hawaii: Initial Steps

Establishing a compliant payroll system in Hawaii begins with several crucial registration and form collection processes at both federal and state levels. These foundational steps are essential for legal operation and accurate tax remittance.

Obtaining Federal Employer Identification Number (EIN)

The first step for any new employer is to obtain an EIN from the Internal Revenue Service (IRS). This unique nine-digit number is required for federal tax purposes, including the reporting and payment of Federal Insurance Contributions Act (FICA) taxes (Social Security and Medicare) and Federal Unemployment Tax Act (FUTA) taxes. Businesses can apply for an EIN online through the IRS website, by mail, or by fax.

Registering with the Hawaii Department of Taxation (DOTAX)

To comply with state tax obligations, businesses must register with the Hawaii DOTAX to obtain a state withholding (WH) account number. This number is necessary for remitting Hawaii state income taxes withheld from employee wages. Registration is typically accomplished by filing Form BB-1, the Basic Business Application. This versatile form can also be used to apply for other state tax licenses and permits, such as the General Excise Tax (GET) license and to register for unemployment insurance with the DLIR. Employers can submit Form BB-1 online via the Hawaii Tax Online portal or by mailing the completed paper form. There is no fee to open a withholding account with DOTAX.

Registering with the Hawaii Department of Labor and Industrial Relations (DLIR)

Employers are also required to register with the DLIR's Unemployment Insurance Division (UID) to obtain a State Unemployment Insurance (SUI) account number. This registration is mandatory for employers liable for SUI contributions. The DLIR mandates that new employers register online through its dedicated employer web application, accessible via uiclaims.hawaii.gov; paper forms like the UC-1 are no longer accepted for this purpose. This registration should be completed within 20 days of hiring the first employee.

The dual registration requirement with both DOTAX and DLIR, although somewhat facilitated by the multi-purpose Form BB-1 and the availability of online portals, demands careful attention from new employers. It is crucial to ensure that all necessary accounts, particularly for state income tax withholding and SUI, are established correctly and with the appropriate agencies. A misstep in this initial phase, such as assuming Form BB-1 fulfills all DLIR registration needs without completing the separate online UI registration, can lead to a cascade of filing and payment errors, potentially resulting in penalties.

Collecting Essential Employee Forms

Once registered, employers must collect specific forms from each new employee to ensure accurate payroll processing and tax withholding:

• Federal Form W-4 (Employee’s Withholding Certificate): This standard IRS form is used by employees to declare their federal income tax withholding allowances and filing status.
• Hawaii Form HW-4 (Employee’s Withholding Allowance and Status Certificate): This is Hawaii's equivalent of the federal W-4 and is used to determine the correct amount of Hawaii state income tax to withhold. If an employee fails to submit a completed Form HW-4, the employer is required to withhold state income tax as if the employee is single and claiming zero withholding allowances.
• Form I-9 (Employment Eligibility Verification): This federal form, mandated by U.S. Citizenship and Immigration Services (USCIS), is used to verify the identity and employment authorization of individuals hired for employment in the United States. Employers must complete and retain a Form I-9 for every employee.
• Form HC-5 (Employee Notification to Employer): This Hawaii-specific form is used by employees who are eligible to waive coverage under the state's Prepaid Health Care Act (PHCA) due to qualifying alternative coverage (e.g., Medicare, coverage as a dependent on another plan). This form must be completed by the employee and kept on file by the employer. Waivers are typically valid for one year and must be renewed annually.

The onboarding process in Hawaii necessitates the collection of these state-specific forms in addition to standard federal paperwork. Failure to obtain a Form HW-4 can result in incorrect state income tax withholding, potentially causing issues for both the employee and employer at tax time. Similarly, improper management of Form HC-5 waivers for PHCA can lead to significant employer liability for healthcare costs if an employee is found to have been incorrectly waived or if the waiver documentation is missing or outdated.

Understanding and Complying with Hawaii Labor Laws (Wage Standards Division - WSD)

The DLIR's Wage Standards Division (WSD) enforces Hawaii's laws concerning wages, hours of work, and other terms and conditions of employment. Small businesses must be acutely aware of these state-specific provisions, which often supplement or exceed federal standards.

Minimum Wage

Hawaii's minimum wage is currently $14.00 per hour, effective January 1, 2024. The state has a schedule of future increases: the minimum wage will rise to $16.00 per hour on January 1, 2026, and further to $18.00 per hour on January 1, 2028. Employers in Hawaii must pay the state minimum wage, as it is higher than the current federal minimum wage of $7.25 per hour.

For tipped employees, Hawaii law permits employers to pay a cash wage below the standard minimum wage, provided that the employee's cash wages plus tips equal at least $7.00 more per hour than the applicable minimum wage. For 2024, with a $14.00 minimum wage, this means tipped employees must earn at least $21.00 per hour (wages + tips). The maximum tip credit an employer can take is $1.25 per hour (meaning a minimum cash wage of $12.75 per hour). This specific tip credit allowance is effective through December 31, 2025.

Overtime

Hawaii law requires employers to pay overtime compensation at a rate of one and one-half times an employee's regular rate of pay for all hours worked in excess of 40 in a workweek. This aligns with the federal Fair Labor Standards Act (FLSA). Generally, Hawaii does not mandate daily overtime (i.e., pay for hours worked over eight in a single day is not considered overtime unless the weekly 40-hour threshold is also surpassed). An exception exists for employees working on State or county public works construction projects governed by HRS Chapter 104; these workers are entitled to overtime for hours worked beyond eight in a day, as well as for all hours worked on weekends and state holidays.

Accurately calculating the "regular rate of pay" is crucial for overtime purposes. This rate includes all forms of remuneration paid to an employee for employment, not just their hourly wage or salary. For salaried non-exempt employees, commissions, or piece-rate workers, the regular rate must be determined by dividing total weekly earnings by total hours worked. For tipped employees, overtime compensation must be calculated based on the full state minimum wage, not the lower cash wage paid by the employer after taking a tip credit.

Pay Frequency and Paydays

Employers in Hawaii are required to pay their employees all earned wages at least twice per month (semi-monthly). Furthermore, these payments must be made within seven days after the end of each pay period.

Final Paychecks

Hawaii law has specific rules for issuing final paychecks:

• Terminated Employees: If an employee is discharged, their final wages are due immediately. If immediate payment is not possible, the employer must issue the final paycheck no later than the next business day.
• Employees Who Resign: If an employee resigns, they must be paid on the next regularly scheduled payday. However, if the employee provided at least one full pay period's notice of their intention to quit, their final wages are due on their last day of employment.
• Accrued Vacation: Employers are not required by Hawaii law to pay out accrued, unused vacation time upon separation unless there is an employment contract or established company policy that stipulates such payment.

Pay Stubs (Wage Statements)

At the time of each wage payment, employers must provide each employee with an itemized written statement. This pay stub must clearly show:

• The employer's name
• The employee's name
• The inclusive dates of the period for which the employee is paid
• Total gross compensation earned
• Total hours worked, with a distinction between regular hours and overtime hours
• All pay rates (regular and overtime)
• An itemized list of all deductions made from wages, including the amount and specific purpose of each deduction
• Net pay.

Meal and Rest Breaks

Hawaii state law does not mandate specific meal or rest breaks for adult employees. The provision of such breaks is determined by employer policy. However, for minors aged 14 and 15, the Hawaii Child Labor Law (HRS Chapter 390) requires employers to provide at least a 30-minute rest or meal period after five consecutive hours of work.

Pay Transparency Law (Effective January 1, 2024)

A significant recent development is Hawaii's pay transparency law, which applies to private employers with 50 or more employees (this count includes full-time, part-time, and temporary employees, irrespective of their work location). This law mandates the inclusion of salary ranges or hourly pay rates in all job advertisements, whether for internal or external positions. The primary goal of this legislation is to promote pay equity and reduce wage disparities based on protected characteristics. While the law does not explicitly require the disclosure of benefits or bonus potential in job postings, employers are encouraged to provide such information to enhance transparency. Specific penalties for non-compliance are not detailed in the law itself, but failure to adhere to these requirements could negatively impact an employer's reputation and may lead to enforcement actions, including corrective measures and potential financial penalties.

Compensatory Time ("Comp Time")

Under Chapter 387, HRS (Wage and Hour Law), there is generally no provision for granting compensatory time off in lieu of cash overtime pay. However, the DLIR recognizes a limited exception for salaried employees only. Comp time may be used if all the following conditions are met:

• The employee is allowed to take the compensatory time off within the same pay period in which the overtime hours were worked.
• The compensatory time is earned at a rate of one and one-half times the number of overtime hours worked.

This narrow provision offers very little practical flexibility for most overtime situations. If these strict conditions are not met, cash overtime payment is required. Businesses should be extremely cautious if considering comp time, as misuse can easily lead to wage and hour violations.

Holiday Pay and Canceled Shifts

Holiday Pay: Hawaii law does not require employers to pay employees a premium rate (e.g., time and a half) for working on holidays. Payment for holiday work is at the employer's discretion, although employers must, of course, pay for all hours actually worked at the employee's regular rate (or overtime rate if applicable).

Canceled Shifts/Reporting Time Pay: There is no state requirement for an employer to pay an employee for a shift that is canceled in advance. Similarly, if an employee reports to work at their scheduled time and is immediately informed that no work is available and is allowed to leave, no reporting time pay is mandated. However, a crucial distinction exists: if an employee reports to work as scheduled and is "suffered or permitted to wait" for work to become available before being informed that there is no work, the employer must compensate the employee for that waiting time at their regular rate of pay. This "suffered or permitted to wait" rule necessitates clear and immediate communication from employers if scheduled work is unavailable upon an employee's arrival, to avoid incurring wage obligations for unproductive waiting time. This is particularly relevant for businesses in service industries where demand can fluctuate unpredictably.

Federal Payroll Obligations for Hawaii Employers

In addition to Hawaii's state-specific laws, small businesses must also comply with a range of federal payroll and employment regulations, primarily enforced by the U.S. Department of Labor (DOL) and the Internal Revenue Service (IRS).

Fair Labor Standards Act (FLSA)

The FLSA is the cornerstone of federal wage and hour law. It establishes:

• The federal minimum wage, which is currently $7.25 per hour. However, Hawaii employers must adhere to the higher state minimum wage.
• Overtime pay requirements, mandating payment at one and one-half times the regular rate of pay for all hours worked over 40 in a workweek for non-exempt employees.
• Recordkeeping obligations, requiring employers to maintain accurate records of employee hours worked and wages paid.
• Child labor standards, restricting the hours and types of work for minors.
• A requirement for employers to display an official FLSA poster outlining employee rights in a conspicuous place.

The FLSA generally applies to employees of enterprises that have an annual gross volume of sales made or business done totaling $500,000 or more, or to employees individually covered because they are engaged in interstate commerce or in the production of goods for commerce. It is important to note that "interstate commerce" is interpreted very broadly by courts and federal agencies. Activities such as processing credit card transactions, using out-of-state suppliers, or utilizing the internet for business communications can bring a business under FLSA coverage. Consequently, very few Hawaii small businesses are likely to be exempt from federal wage and hour laws, even if their operations are primarily local. The default assumption should be that the FLSA applies.

Federal Income Tax Withholding (FITW)

Employers are responsible for withholding federal income tax from their employees' wages. The amount to be withheld is determined based on the information provided by the employee on their Form W-4 (Employee’s Withholding Certificate) and the applicable IRS withholding tables found in Publication 15-T, Federal Income Tax Withholding Methods.

Social Security and Medicare Taxes (FICA)

FICA taxes fund the Social Security and Medicare programs and are shared by employers and employees.

• The total FICA tax rate is 15.3% of an employee's gross earnings subject to FICA.
• The employer pays 7.65% (6.2% for Social Security and 1.45% for Medicare).
• The employee pays an equal 7.65%, which is withheld from their wages by the employer.

The Social Security portion of the tax is subject to an annual wage base limit ($168,600 for 2024; this amount is typically adjusted annually by the Social Security Administration). There is no wage base limit for the Medicare portion.

Additional Medicare Tax: Employers must withhold an additional 0.9% Medicare tax from employee wages that exceed $200,000 in a calendar year. There is no employer match for this additional tax.

Federal Unemployment Tax Act (FUTA)

FUTA tax is paid by employers only and funds the federal unemployment insurance program and administration.

• The FUTA tax rate is 6.0% on the first $7,000 of wages paid to each employee during the year.
• Employers who pay their state unemployment taxes in full and on time are generally eligible for a credit of up to 5.4% against their FUTA tax liability. This means the effective FUTA tax rate for most employers is 0.6% (6.0% - 5.4%) on the first $7,000 of each employee's wages.

Executive, Administrative, Professional (EAP) Exemptions from FLSA Minimum Wage and Overtime

The FLSA provides exemptions from its minimum wage and overtime requirements for certain employees who are employed in a bona fide executive, administrative, professional (EAP) capacity, or as outside salespersons, or in certain computer-related occupations. To qualify for an EAP exemption, an employee must generally meet three tests:

• Be paid on a salary basis (a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed).
• Be paid at least the minimum salary level set by federal regulations.
• Primarily perform exempt job duties as defined by the DOL.

The federal minimum salary thresholds for EAP exemptions have been subject to recent and significant updates:

Hawaii also has provisions within its state wage and hour law (Chapter 387, HRS) that define certain exempt categories, some of which include a salary component, such as an individual receiving "guaranteed compensation of $2,000.00 or more per month". It is critical for employers to understand that to be properly exempt, an employee must meet the requirements of both federal and state law. If the laws differ, the standard that provides greater protection (e.g., higher salary threshold, stricter duties test) to the employee applies. Given the substantial increases in the federal salary thresholds, these will likely be the controlling salary levels for most EAP exemption considerations in Hawaii. Relying solely on older, lower state salary benchmarks (like the $2,000/month figure) for FLSA exemption purposes would lead to misclassification and significant overtime liability if the federal salary level and duties tests are not also met.

Hawaii-Specific Payroll Taxes and Contributions

Beyond federal obligations, Hawaii employers face a unique suite of state-mandated payroll taxes and contributions that require careful administration. These include State Income Tax withholding, State Unemployment Insurance, Temporary Disability Insurance, and the Prepaid Health Care Act.

State Income Tax (SIT) Withholding

Employers in Hawaii are required to withhold state income tax from wages paid to their employees for services performed in the state.

Employee Form HW-4: Similar to the federal W-4, employees must complete Form HW-4, Employee’s Withholding Allowance and Status Certificate, to declare their Hawaii withholding allowances and filing status. Employers use this form to determine the correct amount of SIT to withhold. If an employee does not submit a Form HW-4, the employer must withhold SIT as if the employee is single and claiming zero allowances.

Withholding Tables and Calculation Methods: The Hawaii Department of Taxation (DOTAX) publishes Booklet A, Employer's Tax Guide, annually. This guide contains the official state income tax withholding rates, tables, and calculation methods. Hawaii employs a progressive income tax system, meaning tax rates increase as income levels rise. For 2025, illustrative tax rates for a single individual range from 1.40% on income up to $9,600, to 7.90% on income over $125,000, with several brackets in between. Employers must use the current year's official DOTAX tables for accurate calculations.

Reporting and Payment:

• Form HW-14 (Quarterly Withholding Return): Employers must file Form HW-14 with DOTAX each quarter to report the total state income tax withheld from all employees during that quarter. The due dates for Form HW-14 are April 15, July 15, October 15, and January 15.
• Payment Schedules: The frequency of depositing withheld SIT depends on the employer's total annual withholding tax liability:
  • Annual liability over $40,000: Semi-weekly deposits are required.
  • Annual liability between $5,000 and $40,000: Monthly deposits are due by the 15th day of the month following the month in which the taxes were withheld.
  • Annual liability less than $5,000: Quarterly deposits are due at the same time as Form HW-14.
• E-filing and E-payment Mandates: Employers whose annual Hawaii withholding tax liability exceeds $40,000 are required to file their returns (including Form HW-14) and make their tax payments electronically through Hawaii Tax Online. Penalties may be assessed for failure to comply with these electronic mandates.

Annual Reconciliation:

• Form W-2 (Federal) or HW-2 (State): By January 31 of each year, employers must furnish each employee with either a federal Form W-2 or a Hawaii Form HW-2, Statement of Hawaii Income Tax Withheld and Wages Paid, detailing their annual wages and taxes withheld. DOTAX accepts either form.
• Form HW-30 (Employer's Annual Transmittal of Hawaii Income Tax Withheld from Wages): If submitting paper copies of Forms W-2/HW-2 to DOTAX, employers must include Form HW-30 as a transmittal document. This is also due by January 31. Form HW-30 is not required if W-2/HW-2 information is submitted electronically via Hawaii Tax Online (e.g., through EFW-2 upload). It's important to note that Form HW-3, the Employer's Return and Reconciliation of Hawaii Income Tax Withheld from Wages, has not been required since tax year 2020.

State Unemployment Insurance (SUI)

Hawaii's SUI program provides temporary financial assistance to eligible workers who lose their jobs through no fault of their own. The program is funded by taxes paid by employers.

Employer Liability and Registration: Most employers who have one or more employees working in Hawaii are subject to SUI taxes and must register with the DLIR Unemployment Insurance Division (UID) to obtain an SUI account number.

Taxable Wage Base: SUI taxes are assessed on employee wages up to a certain annual limit per employee, known as the taxable wage base. For calendar year 2025, the SUI taxable wage base in Hawaii is $62,000 per employee. This figure can change annually, and employers must use the correct wage base for the current year to ensure accurate tax calculations. It is critical for businesses to verify this figure each year from official DLIR sources, as reliance on outdated information can lead to underpayment and penalties.

Contribution Rates:

• New Employers: Are typically assigned a specific SUI tax rate for an initial period until they establish an experience rating. For 2025, the new employer rate is 2.40%. (Older sources cited different rates for previous years, e.g., 4.00% for 2023, underscoring the annual variability).
• Experienced Employers: Receive an individualized SUI tax rate each year based on their "experience rating." This rating reflects the amount of SUI benefits paid to their former employees relative to their taxable payroll. Rates for experienced employers in 2025 (under Contribution Rate Schedule C) can range from 0.00% to 5.60%.
• Employment and Training (E&T) Assessment: In addition to the SUI contribution rate, employers are typically assessed a small percentage for the Employment and Training Fund. For 2025, this rate is 0.01% of taxable wages.

Reporting:

• Form UC-B6 (Quarterly Wage, Contribution, and Employment and Training Assessment Report): Employers must file Form UC-B6 with the DLIR UID each quarter. This report details total and taxable wages paid, the number of covered workers, and the SUI contributions and E&T assessment due.
• Due Dates: Quarterly reports and payments are due by April 30 (for Q1), July 31 (for Q2), October 31 (for Q3), and January 31 (for Q4).
• Form UC-B6 must be filed every quarter, even if no wages were paid or no taxes are due for that quarter.

Benefit Charging and Experience Rating: Benefits paid to an employer's former employees are generally charged to that employer's SUI account. These charges can affect the employer's experience rating and, consequently, their SUI tax rate in future years. Employers have the right to respond to benefit claims and provide information regarding employee separations.

Temporary Disability Insurance (TDI)

Hawaii is one of a few states that mandate employers to provide Temporary Disability Insurance (TDI) coverage to their employees for wage replacement during periods of disability caused by non-work-related injury or sickness, including pregnancy.

Employer Mandate: All employers in Hawaii must provide TDI coverage to eligible employees.

Employee Eligibility: Generally, an employee becomes eligible for TDI benefits after having at least 14 weeks of Hawaii employment during which they were paid for 20 hours or more per week and earned not less than $400 in total during the 52 weeks preceding the first day of disability. The employee must also be in "current employment" at the time the disability begins.

Funding and Employee Deductions: Employers can choose to pay the full cost of the TDI premium or share the cost with their eligible employees.

Maximum Employee Deduction: If costs are shared, the employee's contribution cannot exceed 0.5% of their weekly wages, nor can it exceed the maximum weekly deduction amount set annually by the DLIR's Disability Compensation Division (DCD). For calendar year 2025, the maximum weekly deduction an employer can take from an employee's wages for TDI is $7.21.

Benefit Provisions (2025): Eligible disabled employees can receive TDI benefits equal to 58% of their average weekly wages, up to a statutory maximum weekly benefit amount of $837 for 2025. There is typically a seven-consecutive-day waiting period before benefits begin, and benefits can be paid for a maximum of 26 weeks during a benefit year.

Administering TDI:

• Unlike some states with state-run disability funds, Hawaii requires employers to secure TDI coverage through a private insurance plan purchased from an authorized carrier, or by establishing a DCD-approved self-insured plan.
• Self-insured plans require demonstrating financial solvency and obtaining approval from the DCD.
• Claim Process: When an eligible employee becomes disabled, they should notify their employer immediately and request Form TDI-45, Claim for TDI Benefits. The employee completes Part A, their attending physician completes Part C, and the employer completes Part B. The completed form is then submitted to the employer's TDI insurance carrier (or to the employer directly, if self-insured) for processing.

Prepaid Health Care Act (PHCA)

Hawaii's Prepaid Health Care Act is a landmark law requiring employers to provide health insurance coverage to their eligible employees.

Employer Mandate: Employers with one or more eligible employees in Hawaii are generally required to provide a DCD-approved health care plan.

Employee Eligibility: An employee is generally eligible for PHCA coverage if they work at least 20 hours per week for four consecutive weeks and earn monthly wages equivalent to at least 86.67 times the current Hawaii minimum wage. For 2024, with a $14.00 minimum wage, this earnings threshold is $1,213.38 per month (86.67 x $14.00). Coverage must commence no later than the first day of the month following four consecutive weeks of such qualifying employment.

Minimum Plan Standards: Health care plans offered under PHCA must be approved by the DLIR Disability Compensation Division and meet certain minimum benefit standards, which typically include coverage for hospital services, surgical procedures, medical visits, diagnostic tests, and maternity care.

Contribution Requirements: Employers and employees share the cost of PHCA premiums under specific rules:

• The employer must pay at least 50% of the premium cost for employee-only coverage.
• The employee's share of the premium for their own coverage cannot exceed 1.5% of their gross monthly earnings, or 50% of the premium cost, whichever amount is less. If the 1.5% calculation results in an amount less than 50% of the premium, the employer is responsible for paying the difference.

Waivers: An eligible employee may waive PHCA coverage if they have comparable health coverage through another source, such as Medicare, Medicaid, a military health plan, or as a dependent on another family member's qualified plan. To waive coverage, the employee must complete and sign Form HC-5, Employee Notification to Employer. Employers must keep these waiver forms on file, and they must be renewed annually.

Continuation of Coverage During Disability: If an employee becomes disabled and is unable to work, the employer is obligated to continue contributing their share of the PHCA premium to maintain the employee's health care coverage. This continuation generally lasts for three months following the month in which the employee became disabled, or for the period during which the employer continues to pay regular wages to the disabled employee, whichever is longer. This PHCA requirement is distinct from and may run concurrently with FMLA leave.

The interplay between TDI and PHCA, both administered by the DCD and addressing non-work-related health issues, often creates significant compliance challenges for Hawaii small businesses. While related in purpose, their funding mechanisms (TDI is primarily wage replacement insurance; PHCA is health care coverage), employee eligibility criteria, benefit types, and contribution rules are distinct. This necessitates separate tracking, plan administration, and employee communication for each mandate. Employers cannot simply have a generic "disability plan"; they must manage two separate but interconnected programs, each with its own detailed set of regulations. Furthermore, the requirement for DLIR DCD approval for both TDI insurance policies (or self-insurance plans) and PHCA health plans means employers cannot simply select any standard insurance product available on the market. They must ensure that their chosen plans specifically meet Hawaii's minimum standards and have received DCD approval. This adds an administrative step and may limit the range of plan choices, particularly for smaller employers, compared to businesses operating in states without such stringent mandates.

Worker Classification: Employees vs. Independent Contractors

The correct classification of workers as either employees or independent contractors is a critical compliance issue with significant financial and legal ramifications for Hawaii businesses. Misclassifying an employee as an independent contractor can lead to substantial liabilities, including back payment of withheld income taxes, employer and employee shares of FICA taxes, federal and state unemployment taxes, unpaid overtime compensation, and penalties for failure to provide mandated benefits like TDI, PHCA, and workers' compensation coverage.

Federal Tests for Worker Classification

IRS Common Law / 20-Factor Test: The IRS traditionally uses a common law test that examines evidence across three main categories:

• Behavioral Control: Facts showing whether the business has the right to direct and control how the worker performs the specific tasks for which they are engaged. This includes the extent of instructions given (how, when, where to work, tools to use, assistants to hire) and training provided by the business.
• Financial Control: Facts showing whether the business has the right to direct or control the economic aspects of the worker's activities. This includes the worker's investment in equipment or facilities, whether they incur unreimbursed business expenses, their opportunity for profit or loss, whether their services are available to the broader market, and how they are paid (e.g., regular wage vs. flat fee per job).
• Relationship of the Parties: Facts showing how the worker and the business perceive their relationship. This includes the existence of written contracts describing the intended relationship, whether the business provides employee-type benefits (insurance, pension, paid leave), the permanency of the relationship, and the extent to which the services performed are a key aspect of the regular business of the company.

Employers can request a determination of a worker's status for federal tax purposes by filing Form SS-8 with the IRS, though this process can take several months.

FLSA Economic Reality Test: For purposes of the Fair Labor Standards Act (minimum wage and overtime), courts and the U.S. Department of Labor apply an "economic reality" test to determine if a worker is an employee. This test focuses on whether the worker is economically dependent on the business or is, in fact, in business for themselves. The USDOL issued a final rule, effective March 11, 2024, revising its guidance on independent contractor status under the FLSA. This rule rescinded a 2021 rule and returned to a "totality-of-the-circumstances" analysis, considering multiple economic reality factors, with no single factor being dispositive. The six factors generally considered are:

• Opportunity for profit or loss depending on managerial skill.
• Investments by the worker and the potential employer.
• Degree of permanence of the work relationship.
• Nature and degree of control exerted by the potential employer.
• Extent to which the work performed is an integral part of the potential employer’s business.
• Skill and initiative required for the work.

Hawaii Specific Tests for Worker Classification

Hawaii also has its own tests and definitions for determining employee status, which can differ depending on the specific law being applied (e.g., unemployment insurance, wage and hour).

Unemployment Insurance (HRS Chapter 383): The "ABC Test" For state unemployment insurance purposes, Hawaii law (HRS §383-6) presumes that a service performed for wages is employment, irrespective of common law master-servant relationships, unless the employing unit can demonstrate to the DLIR that all three of the following conditions are met (commonly known as the "ABC Test"):

• (A) The individual has been and will continue to be free from control or direction over the performance of such service,...source contract of hire and in fact.
• (B) The service is either outside the usual course of the business for which the service is performed, or the service is performed outside of all the places of business of the enterprise for which the service is performed.
• (C) The individual is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the contract of service.

Hawaii Administrative Rules (HAR) §12-5-2 further defines terms used in the ABC test and incorporates 20 common law factors (similar to the IRS factors) as a guide in determining the "control" aspect under part A. The stringency of the ABC test, particularly prongs B and C, makes it significantly more difficult for employers in Hawaii to classify workers as independent contractors for SUI purposes compared to the more flexible federal tests. A worker might meet federal criteria for independent contractor status but fail Hawaii's ABC test, thus being considered an employee for state unemployment tax liability. This creates a complex compliance scenario where dual statuses could exist.

Wage and Hour Laws (HRS Chapter 387 - Wage and Hour Law & HRS Chapter 388 - Payment of Wages): The definition of "employee" under Hawaii's Wage and Hour Law (HRS §387-1) is broad, generally including "any individual employed by an employer," though it lists specific exclusions (e.g., individuals with guaranteed compensation of $2,000 or more per month, bona fide EAP employees meeting specific state definitions, certain agricultural workers, family members, etc.). Similarly, the Payment of Wages Law (HRS §388-1) defines an "employee" broadly as "any person suffered or permitted to work". While these chapters do not explicitly codify a multi-factor test like the ABC test for SUI, the DLIR's Wage Standards Division, in enforcing these laws, would likely consider the degree of control the employer exercises over the worker and the overall economic realities of the relationship, drawing from principles similar to the FLSA and common law. The "suffered or permitted to work" standard is a very broad definition that tends to favor employee status. The burden of proof rests on the employer to demonstrate that a worker is genuinely an independent contractor and not an employee entitled to minimum wage, overtime, and other wage payment protections. Relying solely on a written "independent contractor agreement" is insufficient if the actual working relationship reflects that of an employer and employee.

Penalties for Misclassification in Hawaii

The consequences of misclassifying employees as independent contractors can be severe and costly:

• Tax Liabilities: Employers can be held liable for unpaid employer and employee portions of FICA taxes, federal income tax withholding, FUTA taxes, and state unemployment insurance contributions. The IRS can impose penalties such as $50 for each Form W-2 that should have been filed, penalties equal to 1.5% of the wages, plus 40% of the FICA taxes not withheld from the employee and 100% of the matching FICA taxes the employer should have paid, along with accrued interest and failure-to-pay penalties.
• Wage and Hour Violations: Liability for unpaid minimum wages and overtime compensation, often with liquidated damages (double back wages).
• Benefit Liabilities: Responsibility for providing or funding benefits the worker would have been entitled to as an employee, such as TDI and PHCA coverage, and workers' compensation.
• Lawsuits: Increased risk of individual or class-action lawsuits from misclassified workers seeking back pay and benefits.
• Other Penalties: If misclassification is deemed intentional or fraudulent, more severe fines and even criminal penalties can be imposed.

Payroll Processing and Administration

Once the initial setup is complete and worker classifications are correctly determined, the ongoing administration of payroll involves several key processes, each requiring precision to maintain compliance.

Calculating Gross Pay

Gross pay represents an employee's total earnings before any deductions. It includes regular wages or salary, overtime pay, commissions, bonuses, and any other form of compensation for labor or services rendered.

Overtime Calculation

• Hourly Non-Exempt Employees: Gross pay is calculated as (Regular Hourly Rate x Hours up to 40) + (Regular Hourly Rate x 1.5 x Overtime Hours worked beyond 40).
• Salaried Non-Exempt Employees: To calculate overtime for a salaried non-exempt employee, their regular rate of pay must first be determined. This is typically done by dividing their weekly salary by the number of hours the salary is intended to compensate (usually 40 hours). Overtime is then paid at 1.5 times this regular rate for all hours worked over 40 in a workweek.
• Tipped Employees Overtime: A common point of error is the overtime calculation for tipped employees. In Hawaii, overtime for tipped employees must be calculated based on the full state minimum wage (currently $14.00 per hour), not on their lower direct cash wage paid by the employer after taking a tip credit. For example, if the minimum wage is $14.00, the overtime rate is $14.00 x 1.5 = $21.00 per hour. The employer is responsible for ensuring the employee receives this full overtime rate, considering both direct wages paid and tips received. This means the actual cost of overtime for tipped staff can be significantly higher than if calculated merely on their cash wage.

Permissible Payroll Deductions

Employers may only make certain deductions from an employee's wages. These fall into two main categories:

• Legally Required Deductions: These include federal income tax, Hawaii state income tax, FICA taxes (employee's share of Social Security and Medicare), the employee's portion of TDI premiums (up to the legal limit), and court-ordered wage garnishments (e.g., for child support or creditor debts).
• Voluntary Deductions (with Written Employee Authorization): Other deductions, such as the employee's share of PHCA premiums, contributions to other health insurance plans or retirement plans (e.g., 401(k)), union dues, or repayments of advances, can only be made with the explicit written consent of the employee. Hawaii law (HRS §40-54) specifically authorizes certain deductions for state and county government employees if requested in writing. The general principle for private employers is that any deduction not mandated by law requires clear, voluntary, written authorization from the employee. Employers generally cannot dock the pay of salaried exempt employees for variations in the quality or quantity of work performed, though there are limited exceptions under federal law. Proration of a salaried employee's pay is permissible if they work less than their agreed-upon weekly hours due to an absence or upon termination of employment.

Wage Garnishment Rules in Hawaii

When an employer receives a legal order to garnish an employee's wages for a consumer debt, Hawaii law places specific limits on the amount that can be withheld from an employee's disposable earnings:

• 5% of the first $100 of disposable income per month.
• 10% of the next $100 of disposable income per month.
• 25% of all disposable income exceeding $200 per month.

Garnishments for child support or spousal support are subject to different, often higher, limits under federal and state law. Employers who receive an Income Withholding Order (IWO) for child support must comply with its terms and are also required to report the termination of employment of an employee subject to an IWO to the issuing child support agency.

Choosing a Payroll Schedule

Employers must establish a regular payroll schedule. As per Hawaii law, employees must be paid at least semi-monthly (twice a month). Common payroll frequencies that meet this requirement include weekly, bi-weekly (every two weeks), or semi-monthly (e.g., on the 15th and last day of the month). The chosen schedule should be communicated to employees and adhered to consistently.

Issuing Paychecks and Direct Deposits

Employers can pay wages via physical paycheck, direct deposit into an employee's bank account, or, under certain conditions, via a pay card. Direct deposit is a widely preferred method for its convenience and security. Regardless of the payment method, a detailed pay stub meeting Hawaii's requirements must be provided to the employee with each payment. The specific requirements for pay stubs in Hawaii, such as itemizing the purpose of each deduction, necessitate a robust payroll system or careful manual preparation to ensure full compliance. Generic pay stubs may not include all mandated information and could lead to violations.

Record-Keeping Requirements

Maintaining accurate and comprehensive payroll records is not just good business practice; it is a legal requirement under both federal and Hawaii state laws. These records are essential for demonstrating compliance during audits or investigations by labor and tax authorities.

Federal Requirements (FLSA)

The Fair Labor Standards Act mandates that employers keep certain records for each non-exempt worker. These generally include:

• Employee's full name, Social Security number, address, birth date (if under 19), sex, and occupation.
• Hour and day when workweek begins.
• Total hours worked each workday and each workweek.
• Basis on which wages are paid (e.g., "$15 per hour," "$800 per week").
• Regular hourly pay rate for any week when overtime is worked.
• Total daily or weekly straight-time earnings.
• Total overtime earnings for the workweek.
• All additions to or deductions from wages.
• Total wages paid each pay period.
• Date of payment and the pay period covered by the payment.

Payroll records under FLSA should generally be retained for at least three years. Records on which wage computations are based (such as time cards, wage rate tables, work and time schedules, and records of additions to or deductions from wages) should be kept for at least two years.

Hawaii State Requirements

Hawaii state agencies also have specific record-keeping mandates:

• DLIR - Wage Standards Division (WSD) (HRS Chapters 387, 388): Employers must keep records showing:
  • Employee's name, home address, Social Security number, and occupation.
  • Rate of pay.
  • Hours worked each day and each workweek.
  • Total straight-time wages and total overtime wages.
  • The amount and purpose of any additions to or deductions from wages.
  • Total wages paid each pay period and the date of payment.
  Hawaii law generally requires these payroll records to be kept for at least six years.
• DLIR - Unemployment Insurance Division (UID) (HRS Chapter 383): Employers must maintain accurate work records for UI purposes for at least five years after the calendar year in which the remuneration was earned. These records should include individual worker information (name, SSN, type of work, dates of hire and separation, rate of pay, wages paid per pay period) and general records for each pay period.
• DLIR - Disability Compensation Division (DCD) (TDI/PHCA):
  • Records of employee waivers of PHCA coverage (Form HC-5) must be kept for at least two years.
  • Employers should also maintain records related to TDI claims, premium payments for both TDI and PHCA, and documentation supporting employee eligibility for these benefits (e.g., hours worked, wages paid).
• DOTAX (Withholding Tax): For state income tax withholding purposes, employers must keep records including:
  • Each employee’s name, current address, and Social Security number.
  • Employee-filed forms such as Form HW-4 and Form HW-6 (Nonresidence in Hawaii).
  • Agreements for withholding additional tax amounts.
  • Details for each payment of remuneration: date, amount (including sums withheld for any reason), period of services covered, amount of remuneration constituting wages subject to withholding, amount of tax collected, and date of tax collection if different from payment date.
  • Copies of all withholding tax returns filed (e.g., Form HW-14, Form HW-30).
  DOTAX generally requires these records to be kept until the statute of limitations expires for assessment or refund, which is typically three years from the date the tax return was due or filed, or two years from the date the tax was paid, whichever is later.
• HIOSH (Hawaii Occupational Safety and Health): Employers must maintain records of serious work-related injuries and illnesses using OSHA Forms 300 (Log), 300A (Summary), and 301 (Incident Report). These records must be kept at the worksite for at least five years. Records of employee exposure to certain toxic substances or harmful physical agents may need to be retained for up to 30 years.

Given the varying retention periods mandated by different laws and agencies, a prudent approach for small businesses is to adhere to the longest applicable period for most general payroll data to ensure comprehensive compliance. For instance, while DOTAX may require 3 years for some tax records, the WSD's 6-year requirement for payroll records under state wage and hour law would take precedence for those specific records. This simplifies internal policy rather than trying to manage multiple destruction schedules for slightly different aspects of an employee's file. Special attention must be paid to records with exceptionally long retention periods, such as HIOSH employee exposure records. Furthermore, the requirement to document the "purpose" of deductions on pay stubs and for WSD record-keeping implies a need for a clear, consistent, and detailed coding system for all payroll deductions, enhancing transparency and audit readiness.

Payroll Solutions for Small Businesses in Hawaii

Managing payroll in Hawaii, with its unique state-specific requirements on top of federal regulations, can be a significant undertaking for small businesses. Several options exist for handling payroll, each with its own advantages, disadvantages, and suitability for different business needs.

DIY Payroll Software

Features: These software solutions typically help with calculating paychecks, withholding taxes, and may offer direct deposit. Some integrate directly with accounting software (like QuickBooks Payroll with QuickBooks accounting).

Pros: Generally the lowest direct cost option, gives the business owner more direct control over the payroll process, and can streamline data entry if integrated with bookkeeping software.

Cons: Places the full burden of compliance on the business owner, including correctly setting up and updating tax tables (federal and Hawaii-specific), understanding and applying rules for PHCA and TDI, and ensuring timely filing of all necessary reports and payments. There is a higher risk of errors if the user lacks expertise or if the software is not specifically configured for Hawaii's nuances. It can also be very time-consuming, and there is often a learning curve.

Suitability: Best suited for very small businesses with a few employees, straightforward payroll needs (e.g., only salaried employees, no complex benefits), and where the owner or a staff member has adequate payroll knowledge, attention to detail, and the time to dedicate to it.

Full-Service Payroll Providers

Features: These providers automate most aspects of payroll, including calculating gross pay, withholding all applicable taxes (federal, state, FICA), managing other deductions (benefits, garnishments), processing direct deposits or printing checks, and filing payroll tax returns (Forms 940, 941, W-2s, state forms like HW-14, UC-B6) with the respective agencies. Many offer employee self-service portals for accessing pay stubs and W-2s, and some provide integrated timekeeping, HR support, and compliance updates.

Pros: Significantly reduces the administrative burden on the small business, improves accuracy in tax calculations and filings, helps ensure timeliness of deposits and reports (reducing penalty risk), and can save considerable time. Many offer expert support.

Cons: More expensive than DIY software. The business is still responsible for providing accurate employee data and hours. The level of specific expertise in handling Hawaii's PHCA and TDI requirements can vary, especially among national providers without a strong local presence or dedicated Hawaii module.

Suitability: Ideal for most small to medium-sized businesses that want to offload the complexities and risks of payroll administration and focus on their core operations.

Professional Employer Organizations (PEOs)

Features: A PEO enters into a co-employment relationship with the client business, becoming the employer of record for tax and compliance purposes. The PEO handles all payroll administration, tax filings, benefits administration (often providing access to its own larger group plans for health insurance, 401(k), etc.), workers' compensation coverage and claims management, and provides comprehensive HR support and risk management services.

Pros: Can offer small businesses access to more robust and often more affordable employee benefits than they could obtain on their own. Comprehensive offloading of HR administrative burdens. Expertise in compliance, including complex state-specific laws like Hawaii's.

Cons: Typically the highest cost option. The co-employment model means some loss of direct control over HR functions, and it's a more integrated and complex relationship than simply outsourcing payroll.

Suitability: Businesses looking for a complete HR outsourcing solution, particularly those that want to offer competitive benefits to attract and retain talent, and those operating in complex regulatory environments like Hawaii. The complexity of Hawaii's state-specific HR and benefits administration, especially PHCA and TDI, makes PEOs an attractive option for many local small businesses seeking to offload these significant burdens.

Considerations for Hawaii: How Solutions Handle PHCA, TDI, and Local Tax Nuances

When selecting a payroll solution, Hawaii small businesses must critically evaluate the provider's capability to accurately and comprehensively manage the state's unique requirements, particularly PHCA and TDI. This goes beyond simple tax deductions and involves:

• Correct calculation of employer and employee contributions for PHCA (with the 1.5% monthly wage cap for employees) and TDI (with the 0.5% weekly wage / $7.21 for 2025 cap for employees).
• Tracking employee eligibility for PHCA and TDI.
• Managing PHCA waivers (Form HC-5), including annual renewals.
• Ensuring that the employer has DCD-approved PHCA and TDI plans in place (the payroll service itself doesn't provide the insurance but should accommodate compliant administration).
• Handling TDI claims processing support.
• Correctly applying Hawaii's specific income tax withholding rules and SUI taxable wage base/rates.

Local Hawaii-based providers are inherently likely to possess deep, nuanced expertise in these Hawaii-specific mandates. National providers often have modules or services tailored for Hawaii payroll, but businesses should specifically inquire about and verify the depth and integration of their PHCA and TDI management capabilities. A payroll system that only handles basic tax deductions without fully addressing the administrative and compliance intricacies of PHCA and TDI may leave the employer exposed to significant risks.

Recent and Upcoming Changes in Hawaii Payroll (2024-2025 and beyond)

The payroll landscape is dynamic, with federal and state laws subject to frequent updates. Hawaii small businesses must remain vigilant to several recent and upcoming changes impacting their obligations. The period between 2023 and 2025, in particular, has seen a confluence of multiple significant updates, creating an exceptionally challenging compliance environment that necessitates proactive review and adjustments to payroll practices, hiring processes, and employee classifications.

• Minimum Wage Increases: As previously detailed, Hawaii's minimum wage increased to $14.00 per hour on January 1, 2024. Further increases are scheduled: to $16.00 per hour on January 1, 2026, and to $18.00 per hour on January 1, 2028.
• Pay Transparency Law: Effective January 1, 2024, Hawaii employers with 50 or more employees are required to disclose salary ranges or hourly pay rates in all job advertisements.
• Federal EAP Salary Threshold Increases: The U.S. Department of Labor's new rule significantly increases the minimum salary thresholds for Executive, Administrative, and Professional (EAP) exemptions under the FLSA. The standard salary level rose to $844 per week ($43,888 annually) on July 1, 2024, and will further increase to $1,128 per week ($58,656 annually) on January 1, 2025. Highly Compensated Employee (HCE) thresholds are also increasing.
• IRS E-Filing Mandate: For tax years beginning in 2023 (returns filed in 2024 and beyond), the IRS requires businesses that file 10 or more returns in aggregate (including Forms W-2, 1099 series, 94x series, etc.) during a calendar year to file those returns electronically.
• DOTAX Mandatory Electronic Filing of Withholding Returns: Reinforcing earlier guidance (Tax Announcement 2019-11), DOTAX Announcement 2023-07 reiterated that employers with an annual Hawaii withholding tax liability exceeding $40,000 must file their withholding returns (e.g., Form HW-14) electronically. Electronic payment is also mandated for these employers.
• DLIR UI System Modernization and Online Tools: The DLIR's Unemployment Insurance Division has been actively modernizing its systems, including launching a "New and Interactive" Employer Web Application for online access to UI accounts, quarterly wage reporting, and other services. Efforts also include enhancing online tools for employers, such as the State Information Data Exchange System (SIDES) for responding to separation information requests.
• DOTAX Withholding Tables for 2025: DOTAX adopted amended Hawaii Administrative Rules for income tax withholding tables for tax year 2025 on December 4, 2024 (Tax Announcement 2024-05). The revised Booklet A, Employer's Tax Guide (Rev. 2024), for use in withholding starting January 1, 2025, is available on the DOTAX website.
• Federal Protections for Nursing Mothers (PUMP Act): The Providing Urgent Maternal Protections for Nursing Mothers Act (PUMP Act), effective April 28, 2023, expanded federal requirements under the FLSA for employers to provide reasonable break time and a private space (other than a bathroom) for nursing employees to express breast milk.
• Hawaii Accommodations for Pregnancy, Childbirth, and Related Medical Conditions: Effective June 27, 2023, Hawaii law requires employers with 15 or more employees to provide reasonable accommodations for known limitations related to an employee's pregnancy, childbirth, or related medical conditions, unless doing so would cause an undue hardship on the employer's operations.

The state's push towards online systems for UI compliance and DOTAX's e-filing mandates reflect a broader trend towards the digitalization of regulatory interactions. While these changes aim to improve efficiency and accuracy in the long run, they can present initial hurdles for small businesses that may be less technologically equipped or staffed, potentially requiring investments in new software, hardware, or training.

Given the frequency and significance of these changes, it is paramount for small business owners to establish a reliable method for staying informed. This may involve regularly monitoring the official websites of the DLIR and DOTAX, subscribing to their newsletters or update services, or engaging with payroll and HR professionals who specialize in Hawaii employment law.

Common Payroll Mistakes and Best Practices for Hawaii Small Businesses

Navigating Hawaii's complex payroll environment can be fraught with potential pitfalls. Awareness of common mistakes and adherence to best practices can significantly mitigate risks and ensure smooth, compliant operations.

Common Pitfalls

• Misclassifying Workers: Incorrectly treating employees as independent contractors to avoid payroll taxes, overtime pay, and benefit obligations (PHCA, TDI, workers' compensation) is a frequent and costly mistake. The consequences, as detailed earlier, are severe.
• Incorrect Overtime Calculation: Errors in calculating overtime are common, especially for salaried non-exempt employees or tipped employees. This includes failing to pay 1.5 times the correct regular rate of pay for all hours worked over 40 in a workweek.
• PHCA Non-Compliance: Failing to offer a DCD-approved health care plan to eligible employees, making incorrect employer or employee contributions (especially regarding the 1.5% employee cap), improperly managing waivers (Form HC-5), or failing to continue coverage appropriately during an employee's disability period.
• TDI Non-Compliance: Not having a DCD-approved TDI plan (insured or self-insured), making incorrect employee deductions (exceeding the 0.5% weekly wage or $7.21 for 2025 cap), or mishandling TDI claims.
• Late or Incorrect Tax Filings/Payments: Missing statutory deadlines for filing payroll tax returns (e.g., Form HW-14, Form UC-B6, federal Forms 941/940) or making inaccurate or late tax deposits can result in substantial penalties and interest charges from both DOTAX and the IRS.
• Inadequate Record-Keeping: Failing to maintain complete and accurate payroll records for the durations required by various federal and state laws.
• Non-Compliant Pay Stubs: Providing pay stubs that lack any of the information required by Hawaii law (e.g., purpose of deductions, hours worked).
• Overlooking Minimum Wage Increases: Failing to update payroll systems to reflect scheduled increases in Hawaii's minimum wage.
• Failure to Obtain/Use Correct Employee Tax Forms: Not obtaining a completed Hawaii Form HW-4 from each employee, leading to incorrect state income tax withholding.

Best Practices for Ensuring Accuracy and Compliance

• Stay Informed: Regularly monitor the websites of the Hawaii DLIR (WSD, UID, DCD) and DOTAX, as well as the IRS and U.S. DOL, for updates to laws, regulations, forms, and tax rates.
• Proper Worker Classification: Diligently apply the appropriate federal and Hawaii tests (especially the ABC test for UI) when determining worker status. When in doubt, it is generally safer to classify a worker as an employee or seek professional legal counsel.
• Accurate Time Tracking: Implement a reliable and accurate system for tracking all hours worked by non-exempt employees, including start times, end times, and any meal breaks taken.
• Understand "Regular Rate of Pay": Ensure a thorough understanding of how to calculate the regular rate of pay for all types of compensation, as this is the basis for overtime calculations.
• Utilize Reputable Payroll Solutions: Consider using reliable payroll software or engaging a full-service payroll provider or PEO, particularly one with demonstrated expertise in Hawaii's specific requirements.
• Meticulous Record-Keeping: Establish a systematic approach to maintaining all required payroll, tax, benefit, and employment records for the legally mandated retention periods.
• Clear Employee Communications: Provide employees with compliant pay stubs at each pay period. Clearly communicate company policies regarding pay, benefits, leave, etc., in writing, and ensure employees acknowledge receipt. Proactive communication about Hawaii-specific deductions like TDI and PHCA is particularly important, as many employees, especially those new to the state, may be unfamiliar with these mandatory programs. Explaining these deductions during onboarding can prevent misunderstandings and disputes.
• Conduct Internal Audits: Periodically review payroll processes, records, and calculations to identify and correct any potential errors or compliance gaps before they are discovered by external auditors.
• Seek Professional Advice When Needed: Do not hesitate to consult with HR professionals, payroll specialists, accountants, or legal counsel who are knowledgeable about Hawaii and federal employment and tax laws.

Tips for Administering PHCA and TDI Effectively

The administration of PHCA and TDI presents some of the most significant ongoing challenges for Hawaii small businesses, extending beyond mere financial cost to encompass a complex administrative burden. Effective management requires:

• Eligibility Verification: Meticulously track employee hours and earnings to determine initial and ongoing eligibility for both PHCA and TDI.
• Plan Compliance: Ensure that the health care plan offered for PHCA and the disability plan for TDI are approved by the DLIR's Disability Compensation Division and meet all statutory minimums.
• Accurate Contribution Calculations: Correctly calculate and apply the statutory caps for employee contributions: for PHCA, the employee's share is the lesser of 1.5% of their monthly gross wages or 50% of the premium for single coverage; for TDI, it's no more than 0.5% of their weekly wages, up to a maximum of $7.21 per week for 2025.
• Waiver Management: Diligently manage PHCA waivers using Form HC-5, ensuring they are properly completed, on file, and renewed annually for eligible employees.
• Continuation of Coverage: Understand and correctly administer the PHCA requirement to continue employer contributions for health coverage during an employee's qualifying disability period.
• Claims Processing: Establish clear procedures for employees to report TDI claims (using Form TDI-45) and ensure these are promptly forwarded to the TDI carrier or processed internally if self-insured.
• Record-Keeping: Maintain detailed records of all PHCA and TDI premium payments, employee contributions, claims filed, waivers, and DCD plan approvals.

Common administrative challenges include accurately tracking eligibility for part-time or variable-hour employees, coordinating benefits if the cause of a disability (work-related vs. non-work-related) is disputed between workers' compensation and TDI, correctly determining the "principal employer" for PHCA purposes in multiple-employer scenarios, and ensuring accurate premium payments when the employee's share is capped by wage percentages. These are not "set it and forget it" programs; they demand ongoing administrative attention.

Key Resources and Contacts

Navigating the complexities of payroll in Hawaii requires access to accurate information and support. The following government agencies and resources are vital for small businesses:

Hawaii Department of Labor and Industrial Relations (DLIR)

• General Information: Phone: (808) 586-8842. Website: labor.hawaii.gov.
• Wage Standards Division (WSD): For inquiries regarding minimum wage, overtime, payment of wages, child labor, and other wage and hour issues. Contact information is available on the DLIR website. Key FAQs can be found at labor.hawaii.gov/wsd/wage-and-hour-faqs/.
• Unemployment Insurance Division (UID): For SUI tax matters, employer registration for UI, and information on unemployment claims. The Employer Web Application is accessible at uiclaims.hawaii.gov. The "Handbook for Employers" concerning UI is a valuable resource. Current tax rate information is also available on the DLIR website.
• Disability Compensation Division (DCD): For all matters related to Temporary Disability Insurance (TDI) and the Prepaid Health Care Act (PHCA), including plan approvals, employee eligibility, and contribution rules. Contact information is available on the DLIR website. Key publications include "Highlights of the Prepaid Health Care Law" and FAQs for TDI and PHCA. The annual maximum TDI deduction and benefit amounts are published by this division.

Hawaii Department of Taxation (DOTAX)

• For state income tax withholding, General Excise Tax (GET), and business registration (Form BB-1). Main Honolulu Office Phone: (808) 587-4242. Website: tax.hawaii.gov.
• Hawaii Tax Online: Portal for electronic filing and payment: hitax.hawaii.gov.
• Booklet A, Employer's Tax Guide: The primary resource for Hawaii state income tax withholding rules, tables, and forms. Available on the DOTAX website.

Internal Revenue Service (IRS)

• For Federal Employer Identification Numbers (EIN), federal income tax withholding, FICA taxes (Social Security and Medicare), and Federal Unemployment Tax Act (FUTA) taxes. Website: www.irs.gov.
• Publication 15 (Circular E), Employer's Tax Guide: Essential for understanding federal payroll tax responsibilities.
• Publication 15-A, Employer's Supplemental Tax Guide: Provides additional details on various federal employment tax topics.

U.S. Department of Labor (DOL), Wage and Hour Division (WHD)

• For information and compliance assistance regarding federal labor laws, including the Fair Labor Standards Act (FLSA) (federal minimum wage, overtime, child labor) and the Family and Medical Leave Act (FMLA). Website: www.dol.gov/agencies/whd.
• The Hawaii District Office can be reached at (808) 541-1361.

Other Resources

• DLIR New Employer Packet: A helpful introductory guide for businesses starting up in Hawaii.
• Hawaii Employers Council: A membership organization providing HR consulting, training, and resources for Hawaii employers.
• Small Business Administration (SBA): Offers general business advice, resources, and support for small businesses. Website: www.sba.gov.

The extensive list of distinct government agencies, their specific websites, unique handbooks, forms, and contact points underscores a significant challenge for small businesses in Hawaii: information fragmentation. Currently, there does not appear to be a single, fully integrated, and easily navigable state-run resource portal dedicated to comprehensive small business payroll compliance. This necessitates that business owners or their administrative staff diligently gather information from these multiple sources, increasing the administrative effort and the potential risk of overlooking critical updates or requirements.

Conclusion

Successfully managing small business payroll in Hawaii is a multifaceted endeavor that extends far beyond basic wage calculation and tax withholding. It demands a thorough understanding of, and meticulous adherence to, a complex interplay of federal regulations and Hawaii's unique state-specific mandates, particularly the Prepaid Health Care Act and Temporary Disability Insurance law. These state programs, while beneficial for employees, impose significant administrative and financial responsibilities on employers.

Key areas requiring diligent attention include accurate worker classification, precise calculation of wages and overtime (especially for tipped employees), compliant administration of PHCA and TDI benefits and contributions, timely and accurate tax filings with both DOTAX and the DLIR, and comprehensive record-keeping. The recent and upcoming changes in minimum wage, pay transparency, and federal exemption thresholds further amplify the need for vigilance and proactive adjustments to payroll and HR practices.

Given the complexities, small businesses are strongly encouraged to:

• Invest in Education: Dedicate time to understanding the specific requirements or ensure that the personnel responsible for payroll are adequately trained.
• Establish Robust Processes: Implement clear, consistent procedures for onboarding, time-tracking, calculating pay, managing deductions, and record retention.
• Leverage Technology Wisely: Consider utilizing reputable payroll software or services, carefully vetting their capabilities to handle Hawaii-specific nuances like PHCA and TDI. Local expertise can be particularly valuable.
• Stay Updated: Actively monitor communications from the DLIR, DOTAX, IRS, and USDOL for changes in laws, rates, and procedures.
• Seek Professional Guidance: When faced with uncertainty, consult with qualified HR professionals, payroll specialists, accountants, or legal counsel experienced in Hawaii employment law.

While the regulatory environment is demanding, a proactive and informed approach to payroll administration will enable Hawaii small businesses to maintain compliance, avoid costly penalties, foster positive employee relations, and focus on their core mission of growth and success in the Aloha State.