Managing client tax liabilities

An increasing number of states are taking a closer look at Payroll Processing and how that can impact money transmission regulation. This has caused major concerns for payroll processors in Texas in particular, where heavy fines have been levied against some processors for operating as an "unlicensed Money Services Business."

Each state has its own set of rules and licensing requirements. The process to become licensed is burdensome and costly. Here´s what you need to know to protect yourself and your company from money transmission requirements.

What is the definition of a money transmitter?

According to FinCEN, a person who engages as a business in the transfer of funds is considered a money service business as a money transmitter. From our understanding of the Texas law, any client funds held for any period of time, for any reason in a processor´s account may be subject to money transmitter licensing requirements.

From our processing experience, the most common type of transaction that would trigger this requirement would be if you are impounding tax monies and holding those funds for your clients. However, the law covers all funds that are held by the payroll service bureau, not just taxes.

What is Kotapay´s solution?

As a division of a bank, Kotapay will set up a For Benefit Of (FBO) bank account in which the processor is removed from having ownership of client funds. These funds are held in an account owned by Kotapay until payment instructions are sent. Online access to the account balance and transaction history is provided for reconciliation.

Why is Kotapay able to hold these funds?

Financial Institutions are exempt from money transmitter regulations, therefore, as a division of First International Bank & Trust, Kotapay is uniquely positioned to facilitate these transactions.

Will I be able to reconcile my account?

Yes, access to online banking will be given to view all transactions and balances in the account.

Will this process work for paper check payments?

Yes. If you have agencies that do not accept an electronic deposit, checks can be written off the FBO account for remittance to the taxing agency.