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STARTING AND OPERATING A BUSINESS IN HAWAII Copyright © 2000, Michael D. Jenkins
CONTENTS OF THIS CHAPTER:
I. INTRODUCTION I. INTRODUCTION Hawaii, with its spectacular natural beauty, balmy year-round climate and friendly "Aloha spirit" is an exceptionally desirable place to visit, or in which to live or do business. Because of its scenery, near-perfect weather, and outstanding tourist facilities, Hawaii is a major destination for tourists from both the U.S. mainland and Asia -- particularly Japan. The very high level of tourist visitation, generally between 6 and 7 million visitors a year, has proved to be both a bane and a blessing. In good times, it has led to very high levels of investment and employment in the state; when tourism drops off suddenly, as it did during and after the 1990-91 Persian Gulf crisis, it can have a severe effect on the entire Hawaiian economy. At present, the state's economy is improving, but is still somewhat weak, in terms of the level of unemployment, which is higher than the national average, and other economic measures. For example, in January, 2000, the state's unemployment rate was 4.9%, having recovered considerably from 6.2% a year earlier, but still well above the national rate of 4.0%. Reduced construction activity in recent years has led to some increases in the level of unemployment in the construction industry, although a gradual recovery is under way. To view the latest federal Bureau of Labor Statistics unemployment rate data for Hawaii or any other state, visit the BLS website. In addition, the state has a relatively high cost of living, with very high housing costs, compared to national averages, although housing prices have eased significantly in many areas of the state in the last few years, as the economy has softened. Taxes are among the nation's highest, in what is not a wealthy state. The Massachusetts Taxpayers Foundation study of state taxes in 2004 (based on 2002 data) found that Hawaii had the fourth-highest state taxes in the nation, of $120.62 per $1,000 of residents' income. New York had the highest state taxes, at $130.79, and Tennessee the lowest, at just under $84 per $1,000 of income. A 2005 study by the Tax Foundation found that Hawaii, at 11.5%, had the third-highest ratio of state taxes to per capita income of any state in the nation, after Maine (13%) and New York (12%). On a more hopeful note, visitor (tourist) counts appear to have risen slightly in 1999, to 6.8 million, marking a substantial recovery in recent years, since the sharp drop-off that was experienced in the early 1990s. In addition, in 1999, hotel-construction-completed increased for the first time since 1993, a strong indicator that the state's economy is at last turning up again. However, despite improving economic conditions in Asia, arrivals of eastbound (Asian) visitors, mainly from Japan, continued to decline in 1999, and total visitor arrivals and hotel occupancy rates were down sharply again in January, 2000. Hawaii has a fairly typical tax structure, in general, but the legal structure under which businesses must operate is uniquely different from other states, with most of the tax and administrative functions that are typically handled at the local level in other states being centralized at the state level. In addition, most city government functions are instead handled by county governments in Hawaii. For example, the mayor of Honolulu is actually the mayor of Honolulu County, which comprises the entire island of Oahu. Each county has a mayor and council, much like the typical city government on the mainland, and fire, police, garbage collection, and similar functions are organized at the county level, rather than the city level. There are only four county governments for the islands: the city and county of Honolulu, and the counties of Hawaii (the Big Island), Kauai, and Maui (which includes the islands of Lanai and Molokai, as well as Maui). Like most states, Hawaii imposes an income tax, a franchise tax on certain financial corporations, a sales and use tax on business gross receipts, and various excise taxes, with property taxes imposed at the county level. Note that the state has enacted a temporary hotel remodeling tax credit for taxpayers who are subject to the income tax and transient accommodations tax. The credit is 4% of the costs incurred in renovating a qualified hotel facility in Hawaii, but cannot exceed 10% of the transient accommodations tax paid for the previous year for that facility. The credit is not available for taxable years that begin after December 31, 1998. Hawaii was the last state, in 1996, to adopt a limited liability company (LLC) law, so that businesses operating in Hawaii in LLC form may now (since April, 1997) obtain the advantages of limited liability, without needing to incorporate or become subject to corporate taxation, generally. At the same time, the legislature also enacted provisions allowing limited liability partnerships (LLPs). II. LEGAL ENTITIES -- FILING FEES AND REPORTING REQUIREMENTS (a) In General. A business that operates in Hawaii can operate as a sole proprietorship, a general or limited partnership, an LLC or LLP, or a corporation. In addition, like the federal tax law, the state income tax law also recognizes S corporations, for income tax purposes, and typically allows the income or losses of an S corporation to "flow through" and be taxed or deducted at the shareholder level, rather than taxing the corporation itself as an entity. Each of the above entities is discussed below, along with the basic requirements for forming such an entity and any general ongoing (non-tax) reporting requirements that are applicable to it. The tax treatment of each form of legal entity is discussed in Section IV below. (b) Sole Proprietorships. In general, sole proprietorships in Hawaii can be formed with no formalities. However, as discussed in Section IV(b), it will generally be necessary to obtain a state business license from the Department of Commerce and Consumer Affairs, plus one or more county business licenses from counties in which you operate and, in some cases, special state licenses, as well. Every sole proprietorship or other business should also immediately register for the General Excise Tax (GET) as well with the Hawaii Department of Taxation. See the address information for those agencies listed in Section VI(a). No separate tax form filing is required, generally, for a sole proprietorship, under the Hawaii income tax law. Instead, as with the Schedule C on your federal Form 1040, you simply report the net income or loss from your sole proprietorship on your state personal income tax return. See Section IV(c) for information on the Hawaii income tax and filing requirements for individuals. As a sole proprietor, if you have no employees, you are not required to pay any unemployment taxes, withhold any federal or state income tax from wages, nor obtain workers' compensation coverage for yourself. (c) Partnerships. As a rule, general partnerships in Hawaii can be formed with few formalities, although it is highly advisable to have a written partnership agreement. A partnership must register with the Department of Commerce and Consumer Affairs, however, and pay a small registration fee of $25 for a general partnership, plus file an annual statement with a $10 fee. Also, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from counties in which you operate and, in some cases, state licenses, for any type of partnership, including general or limited partnerships. A limited partnership, in which there is at least one general partner (who is liable for partnership debts) and at least one limited partner (who is not liable for partnership debts), may also be formed under Hawaii law. Unlike a general partnership, a limited partnership must generally have a written partnership agreement, and must also file a certificate of limited partnership with the Hawaii Department of Commerce and Consumer Affairs, paying a $50 filing fee, or $100 to register a foreign (out-of-state) limited partnership. For information on limited partnership filing requirements, see the contact information for the offices of Department of Commerce and Consumer Affairs, listed in Section VI(a). Limited liability partnerships (LLPs) are a new form of partnership permitted under the laws of Hawaii. Somewhat like an LLC, an LLP provides a degree of limited liability for its owners, while retaining the tax advantages of a partnership for federal and Hawaii state income tax purposes. However, unlike an LLC, an LLP typically operates like a regular partnership, and is not required to file articles of organization. To form an LLP in Hawaii, you must register your partnership with the Department of Commerce and Consumer Affairs by filing Form 425-C, Certificate of Limited Liability Partnership, and paying filing fees of $100 per partner, with a maximum fee of $10,000. Foreign LLPs, those created under the laws of another state, must also register with the Department of Commerce and Consumer Affairs and pay the applicable filing fees, which can range up to $10,000, depending upon the number of partners. The fees are computed as follows:
NUMBER OF PARTNERS -------------- FILING FEE
Fewer than 10 ------------------- $ 1,000
10 to 49 ------------------------ $ 5,000
50 or more ---------------------- $10,000
Annual statements must be filed by all LLPs, along with annual filing fees of $50. LLPs operating in Hawaii have been required to meet certain financial responsibility requirements, either by maintaining adequate liability insurance, in the amount of $100,000 times the number of partners and persons rendering professional services, up to a maximum of $5 million, or else by being able to demonstrate a net worth of at least $10 million. However, effective as of July 1, 2000, Hawaii has adopted the Revised Uniform Partnership Act and has repealed the foregoing insurance and financial responsibility requirements for LLPs. For more information on LLP registration and reporting requirements, see the contact information for the offices of the Department of Commerce and Consumer Affairs, listed in Section VI(a). Note that one potential drawback of LLPs, if you will do business in other states besides Hawaii, is that some states, like California and New York, only recognize certain types of professional partnerships as LLPs. If yours is not a professional partnership, such other states may simply treat your LLP like an ordinary general partnership, with no limitation of liability. A partnership agreement, for any type of partnership, should spell out in considerable detail such matters as the following:
Partnerships, as entities, are not subject to state income tax in Hawaii. Instead, the income or losses of the partnership, as allocated among the partners, must be reported on the personal income tax returns of the individual partners (or on the corporate tax returns of any corporate partners). Partnerships are required to file an annual tax information return with the state. For details on Hawaii partnership tax return filing requirements, see Section IV(c). (d) Corporations. To form a corporation in Hawaii, you must file articles of incorporation with the Hawaii Department of Commerce and Consumer Affairs and pay a fee of $100. A foreign corporation (one formed under the laws of another state or a foreign country), must obtain a certificate of authority before it may legally conduct business in Hawaii, by filing an application for a certificate of authority and paying a filing fee of $100. For more information on filing articles of incorporation or applying for a certificate of authority to do business in Hawaii, see the contact information for the offices of the Department of Commerce and Consumer Affairs, listed in Section VI(a). In addition, once your corporation is formed, it will be required to file annual reports and pay a filing fee of $25 with the Department of Commerce and Consumer Affairs each year. Failure to file this report on a timely basis could result in suspension or revocation of your corporation's charter. In addition to paying federal income taxes on its income, a corporation that does business in Hawaii must also file corporate income tax returns with the state. See Section IV(c) for a discussion of state corporate income tax rates and tax return filing requirements. There is no general corporate franchise tax in Hawaii, unlike many other states. However, there is a franchise tax on banks, savings and loans, small business investment companies (SBICs), and other types of financial corporations. For tax forms and more information on corporate income and franchise taxes in Hawaii, see the contact information for the offices of the Department of Taxation, listed in Section VI(a). (e) S Corporations. An S corporation is simply a regular corporation that has elected, for federal or state income tax purposes, or for both, to be taxed somewhat like a partnership, with its income, losses and tax credits flowing through to its owners, who report such income, losses, or credits on their individual tax returns. Hawaii recognizes S corporations for income tax purposes, and treats them in a manner similar to the federal tax treatment, provided a federal S corporation election is in effect. (f) Limited Liability Companies. Hawaii, like all other states, has at last adopted a limited liability company (LLC) law, which was effective as of April 1, 1997. Hawaii was the last state to adopt LLCs. Thus, in addition to the traditional choices of a sole proprietorship, partnership, or corporation, a business that operates in Hawaii may now also choose to operate in the form of an LLC. In most states, LLCs are very attractive entities for many small businesses, in that they offer the same protection as a corporation from creditors for debts of the business, while offering much of the flexibility plus the flow-through tax treatment of a partnership for federal tax purposes. See Section IV(c) for a discussion of the income tax treatment of LLCs under Hawaii tax laws. To form an LLC under the laws of Hawaii, you must file articles of organization with the Department of Commerce and Consumer Affairs and pay a $100 fee. While state law formerly required that an LLC have at least two members, this requirement was repealed as of March 31, 1997. Foreign LLCs, those formed under the laws of another state, must obtain a certificate of authority to do business in Hawaii, by filing an application for a certificate of authority with the Department of Commerce and Consumer Affairs and paying a $100 fee. All LLCs must file annual reports, together with a filing fee of $25. For more information on filing articles of organization for an LLC, see the contact information for the offices of the Department of Commerce and Consumer Affairs, in Section VI(a). III. BUSINESS ACQUISITIONS (a) In General. When acquiring an existing business, there are a number of state legal and tax issues you or, preferably, your business attorney, should attend to before closing the purchase. These include matters such as doing a title search for any real property that is being acquired, checking for any recorded security interests on personal property items, and thoroughly researching county, state, and federal records for any judgment liens, tax liens, or other liens, before property is acquired. You will also benefit from consulting a tax advisor before the agreement of sale is negotiated, in order to seek a structuring of the agreement so that the purchase price is allocated among the assets in a way that favors you. You may be able to obtain considerable tax savings if the purchase price is allocated in a way that gives you the best possible tax results under federal and state income tax laws, and other state tax laws, such as general excise tax or property tax laws. Depending upon the state (or states) in which the seller's assets are located, you may also have to comply with state bulk sale or bulk transfer laws. You should also obtain tax releases from various state taxing agencies, as discussed below. (b) Bulk Sale Laws. Typical bulk sale laws require either publication of legal notices to all creditors in advance of the sale and recording of such notices in some cases, or maintenance of detailed lists of the property to be transferred, for inspection by the public. Hawaii is one of the states that has recently repealed its bulk sale law, in 1998. Thus, you will no longer need to comply with this law when you purchase assets of an existing business. Despite the repeal of the Hawaii bulk sales law, the seller must still report a bulk sale on Form G-8A to the Hawaii Department of Taxation within ten days after the transfer. As the purchaser, you need to withhold payment until you receive a tax clearance certificate for the general excise tax (GET) or you will become liable for the seller's unpaid GET and any interest or penalties. See Section III(c) for more information on obtaining tax clearances. Compliance with the bulk sales law tax requirements should be handled by a competent business attorney, as its requirements are quite specific and very technical in nature. (c) Tax Releases. When you acquire an existing business, you will want to make sure that you do not unwittingly become liable for any unpaid taxes owed by the seller. Typically, to protect yourself, you will need to receive a tax release or releases from various state taxing agencies, for such taxes as sales and use tax, income tax withholding, and state unemployment taxes, in each state in which the seller does business. If you fail to obtain such a release or written statement from the tax agency that the seller is not delinquent on any tax payments, you will be held responsible for such tax if it is not withheld from the purchase price proceeds and paid to the state at the time the sale of the business transpires. In Hawaii, you should have the seller obtain a tax clearance certificate by filing Form A-6, Application for Tax Clearance, with the Hawaii Department of Taxation, for various state taxes the seller might owe, including income tax withholding, GET, income tax, transient accommodations tax, and other miscellaneous taxes. Tax releases granted after December 1, 1997 are issued cooperatively by both the IRS and the state of Hawaii, and are valid for 6 months after the date issued. (d) Unemployment Tax Rating of Seller. In addition to obtaining tax releases, you may find it advantageous to succeed to the seller's unemployment tax experience rating, if the seller has a tax rate lower than you would otherwise obtain as a new business. To obtain the seller's favorable experience rating as a successor employer, you will need to apply within 60 days after acquiring the seller's business on Form UC-86, requesting that you be treated as a successor employer. To be eligible, the seller must pay all unemployment taxes it owes up to its date of termination within the same 60-day period and must also file a waiver, relinquishing its rights to the experience record. (e) Withholding Tax on Real Estate Purchases. In Hawaii, if you acquire real property from a seller who is a nonresident, you must generally withhold state income tax at a rate of 5% of the amount realized by the seller and pay it over to the state within 20 days. To avoid having to withhold the Hawaii tax, you must receive an affidavit from the seller that states he or she is either:
IV. HAWAII TAXES AND OTHER GENERAL REQUIREMENTS On the other hand, corporate tax rates are fairly low, at a maximum rate of 6.4%, and there is no personal property tax of any kind in Hawaii, on either tangible or intangible property. (b) State and Local Licensing. Nearly any business, operated anywhere in the United States, will have to have at least one government license of some kind. In Hawaii, you will need to register for a state license with the Department of Commerce and Consumer Affairs, and you will also need a local license, issued by the Department of Finance of your county. Before you open your business, contact your local county offices (see addresses listed in Section VI(a)) and find out if your particular business needs one or more local licenses. Most kinds of local business licenses are granted upon simple payment of a fee, with no further requirements. However, if you are engaging in any kind of food business, you will usually need to also obtain a health department permit and show that you are in compliance with health department food-handling requirements. In addition, be sure to check with an attorney or local government zoning or planning department officials to determine if your business will be in compliance with all local zoning and planning restrictions. If you own or rent any type of facility, you will generally need fire department permits, showing that you meet fire safety codes and any construction or improvements to an existing structure will usually require a building permit. If you intend to simply operate your business from your home, you may be in violation of local zoning requirements, but this is less likely to be a concern if you don't have clients, customers, suppliers, or employees coming to your house on business, on a regular basis. State governments have also traditionally required special licenses for many kinds of professionals, such as physicians, dentists, lawyers, and accountants. To further protect consumers, Hawaii has expanded the list of occupations that must be licensed by the state to include many other occupations. Most state licenses not only require payment of fees, but are only issued for a given profession or occupation upon showing that you have completed certain educational or experience requirements, or passed certain tests, or some combination of the foregoing. For information on state licensing and business registration requirements in Hawaii, see the contact information for the Business Registration Division of the Hawaii Department of Commerce and Consumer Affairs, listed in Section VI(a). Or contact the Business Action Center, at the address listed for it in Section VI(a), for assistance. (c) Income and Franchise Taxes. Hawaii has both an individual income tax and a corporate income tax, as well as a franchise tax on banks and certain other financial corporations. Before 1999, the Hawaii individual income tax was imposed at a maximum tax rate of 10%, on taxable income of over $41,000, for married taxpayers filing jointly. Under 1998 tax cut legislation, the top rate on income over $80,000 (for married filing jointly) was reduced in several steps to 8.75% in 1999, 8.5% in 2001, and a top rate of 8.25% after 2001. Individual taxpayers generally pay state income tax on their business earnings from a sole proprietorship, or on their share of the earnings of a pass-through entity, such as a partnership or S corporation. The Hawaii personal income tax return is Form N-11, which must be filed with the Department of Taxation on April 20th for the preceding taxable year. Partnerships are not subject to state income taxation in Hawaii, but must file an information return with the Department of Taxation each year, showing each partner's share of taxable income, losses, and credits, on Form N-20. As an individual partner, you report your share of income or loss on Schedule E of your Hawaii personal income tax return. LLPs are taxed like other partnerships. Individual taxpayers doing business as sole proprietors, or who are partners in a partnerships or shareholders in an S corporation, are required to make payments of estimated Hawaii individual income taxes, on Form N-1 in most cases, if their tax liability is not covered by withholding. No declaration is required if the total estimated tax liability for the year is less than $500. Estimated tax payments are due in four installments, on the 20th day of the 4th, 6th, and 9th months of the taxable year, and the 20th day of the first month of the following year. To avoid penalties for underpayment of estimated tax, you must either pay in 60% of the current year's tax, or 100% of the previous year's tax. The Hawaii corporate income tax rate, on corporations other than S corporations, is a graduated tax of 4.4% on the first $25,000 of income, 5.4% on the next $75,000, and 6.4% on income over $100,000. If your corporation has only limited business activity in the state -- sales only, no real estate owned or rented, no tangible property owned in the state, and gross sales in Hawaii of not over $100,000 -- you may instead elect to pay a flat tax of 0.5% of gross sales, in lieu of the regular corporate income tax. The state corporation income tax return is Form N-30, which must be filed with the Hawaii Department of Taxation by the 20th day of the fourth month following the end of the taxable year, or by April 20th in the case of a corporation whose taxable year is the calendar year. Corporations are required to make estimated tax payments of their state corporate income tax in advance, if their tax liability for the year equals or exceeds $500. If your business is a foreign corporation, you may be excused from filing any estimated tax if the Department of Taxation is satisfied that less than 15% of your corporation's income is attributable to Hawaii. Corporate estimated tax payments are due in advance, on Form N-3, in four equal installments, on the 20th day of the 4th, 6th, and 9th months of the taxable year and the first month of the following taxable year. Penalties will be imposed for failure to make the required estimated tax payments on a timely basis. However, if the preceding year was a full year of 12 months, the current year payments need only be equal to 100% of the prior year's tax liability. Limited liability companies (LLCs) operating in Hawaii will generally be subject to the same tax rules as partnerships. Under recent amendments to the state's LLC law, one-member LLCs are now authorized, which means they can be treated as sole proprietorships for federal, and presumably Hawaii, income tax laws. (d) Sales and Use (General Excise) Tax. Hawaii does not have a typical sales and use tax. Instead, it imposes a general excise tax (GET). The GET is like a broader form of sales tax that applies not only to retail sales of tangible personal property, but also to all kinds of services, real estate rentals, and other types of income, at the statewide rate of 4%. There are currently no local GET taxes, although counties are allowed to adopt such local taxes, at up to a 0.5% tax rate. Unlike most sales taxes, the GET is imposed directly on the seller, and not merely collected from the buyer. Thus if, as a seller, you add GET at 4% to an item you sell, you must also pay tax on the tax you have added on. Not all gross receipts are subject to the GET or its companion use tax. Exemptions include the following:
Reduced rates of 0.5% apply to certain taxpayers, and a rate of 0.15% applies to insurance solicitors' income. Insurance companies are exempted from the GET. Sellers are required to obtain a GET license and to pay over the GET to the Department of Taxation. You should register on form GEW-TA-RV-3, Application for General Excise License and Employer's Withholding Number, which must be submitted with a one-time fee of $20. This form also serves as a registration for the Transient Accommodations Tax and the Rental Motor Vehicle and Tour Vehicle Surcharge Tax, as well as registration for your state identification number as an employer, for state income tax withholding purposes. If you are a wholesaler or retailer who purchases goods that you will resell, your purchase of such goods may qualify as a sale for resale. Similarly, should you sell goods to wholesalers or retailers for resale by them, your sale may also qualify as a sale for resale. Unlike other states, which exempt a sale for resale from tax, Hawaii merely reduces the tax rate from 4% to 0.5%. In any sale made for resale, the exemption is ordinarily available only if the purchaser gives the seller a valid resale certificate, certifying that the items are being purchased for resale, and not for use or consumption by the buyer. In the past, there has been a pyramiding of GET at the 4% rate on many service transactions, where a buyer paid the tax on purchases and then passed the increased cost onto its retail customers, which increase was once again subject to GET at the full 4% rate. However, effective January 1, 2000, this pyramiding effect is being reduced on many service transactions, by treating those transactions in a manner similar to the wholesale sales of tangible personal property. To qualify for the reduced rate, the property sold or the service rendered must become an "identifiable element" of the service, property, contracting, or transient accommodations that will be resold to the purchaser's customers. Eventually, by 2006, the tax rate on such "identifiable elements" will be reduced to the wholesale rate of 0.5%. However, the reduction is being phased in at 0.5% a year, so that the rate in 2000 on such eligible transactions is 3.5%, and 3.0% in 2001. A shadow tax, the use tax, is also imposed at the same rate as the GET. It is primarily intended to tax property that is acquired from sources outside of the state, in transactions not subject to the GET, when such property is used or consumed within Hawaii. However, the use tax is reduced to 0.5% on items that are imported for purposes of resale. Use tax may also apply to items purchased for purposes of resale, if such items end up being used or consumed, instead of being resold. Note that the Hawaii Supreme Court has upheld the use tax on out of state companies that merely mail catalogs to residents of Hawaii, in a recent case. (In the Matter of American Express Travel Related Services Co., Inc., No. 3089, Jan. 23, 1997) Hawaii has adopted the Hawaii Internet Tax Freedom Act, a law which prohibits the imposition of any discriminatory tax on electronic commerce or Internet access, for the years 2000 through 2005. This exemption includes the GET, according to Hawaii Department of Taxation Announcement No. 99-26, dated August 6, 1999. For more information on Hawaii sales and use tax registration and compliance, see contact information for the offices of the Hawaii Department of Taxation in Section VI(a). (e) Real and Personal Property Taxes. In Hawaii, as in every other state, any business real estate you own will be subject to real property taxes. In general, there is little that you must do, unless you wish to challenge your assessed valuation, since the county assessor will bill you for each year's property taxes as they come due. Hawaii, unlike most other states, does not impose any property taxes on personal property, either tangible or intangible. (f) Other Business Taxes. Hawaii imposes a number of other taxes on businesses, including:
(g) Trade Names. A trade name, also known as a fictitious or assumed name, is any name used in the course of business that does not include the actual legal names of all the owners of the business. Thus, if your business goes by any name other than your own real name, it is operating under a trade name. The same is true of a corporation, if it operates under a name other than its legal name. A trade name might also be one that suggests the existence of additional owners, by using such words as "company," "associates," or "group." In most states where you do business, it will be necessary to register a trade, fictitious, or assumed name, so that people who do business with you can find out who the actual owners of your business are. You may also want to register any such trade name, as a means of protecting against other companies usurping that particular trade name. Businesses operating in Hawaii under a fictitious name should register the name as a trade name with the Hawaii Department of Commerce and Consumer Affairs because registration gives some protection against use of the name by competitors. To register a trade name, file an application with the Hawaii Department of Commerce and Consumer Affairs and a declaration that you are the sole and original owner or assignee of the name. There is a $50 fee for registering a trade name. V. EMPLOYER REQUIREMENTS IF YOU HAVE EMPLOYEES (a) Employer Registration and Withholding. If you have any employees, you will already be withholding federal income tax and FICA taxes from their wages. In addition, since Hawaii imposes a state income tax on wages of individuals, you will need to also withhold Hawaii income tax from the wages of your employees. Before you begin to pay wages, you must register as an employer with the Department of Taxation on Form GEW-TA-RV-3, which will also serve as your registration for the general excise tax. For more information on Hawaii income tax withholding and registration requirements for employers, see the contact information for the offices of the Hawaii Department of Taxation, listed in Section VI(a). (b) Unemployment and Other State Payroll Taxes. If your business has one or more employees, you, as an employer, will be required to pay state unemployment tax based on the amount of such wages paid. Employers subject to the Hawaii unemployment tax must register within 20 days after first hiring employees on Form UC-1, Report to Determine Liability under the Hawaii Employment Security Law, to obtain an employer identification number for unemployment tax purposes. New employers are required to pay tax at a rate of 3% (plus a 0.05% employment training tax) in 2000 on the first $27,500 of wages paid to each employee. After you have had employees for a while, you will develop an unemployment tax experience rating. This rating is based on the number of employees you terminate who then claim unemployment benefits and the amount of such benefits paid to those former employees, under a complex formula. The state will inform you when they have assigned you an individual tax rate based on your firm's experience rating. That rate may be higher or, if you have had relatively few benefit claims charged to your account, lower than the standard new employer tax rate you initially were paying. All state unemployment taxes are imposed upon you as the employer, and, under Hawaii law, cannot be charged to your employees or withheld from their wages. For more information on your Hawaii unemployment tax obligations as an employer, see the contact information for the offices of the Unemployment Insurance Division of the Hawaii Department of Labor and Industrial Relations, listed in Section VI(a). (c) Workers' Compensation and Other Mandated Employee Insurance Coverage. While nearly every other state requires employers to carry workers' compensation insurance or to self-insure for such coverage, Hawaii also mandates that employers provide medical coverage (Prepaid Health Care law) and disability coverage (Temporary Disability Insurance law). Each of these three types of coverage is discussed below. (1) Workers' Compensation. Workers' compensation insurance is a state-mandated insurance requirement for most employers, in almost every state. In Hawaii, virtually all businesses with one or more employees are required by law to have workers' compensation insurance, except those able to self-insure. Note, however, that a sole proprietor or a partner in a partnership is generally not considered an employee, and a 50% shareholder-employee of a corporation is also exempted. Failure to obtain such coverage can result in severe monetary penalties or, if you are in default for 30 days or more, an injunction from carrying on your business until the default is cured. Workers' compensation provides wage loss and medical benefits to employees injured on the job and it protects you, as an employer, from legal action for damages for injuries or job-related illnesses suffered by your employees. In effect, it is a "no-fault" insurance system for work-related injuries or illnesses. Thus, if you fail to obtain required workers' compensation insurance, and an employee is injured on the job, you will have opened yourself to unlimited liability and severe legal consequences, so it is very important to obtain workers' compensation insurance for your employees. Be aware that neither general liability nor health and accident insurance can properly substitute for workers' compensation insurance. As an employer, you must complete Form WC-1, Claim for Industrial Injury, as soon as you have knowledge of a disability of a worker, and must post a notice in the workplace informing your employees of their workers' compensation coverage. (2) Prepaid Health Care Insurance (PHC). Hawaii requires employers to provide medical coverage for their employees, in one of three ways:
Most employees are covered, except workers employed for less than 20 hours a week, agricultural seasonal workers, insurance and real estate salespersons paid solely by commission, anyone covered as a dependent under another qualified health care plan, and certain family members. Employers can pay the full cost of coverage, or can require employees to share part of the cost, not to exceed one-half the premium cost or 1.5% of the employee's wages. In certain "hardship" cases, the state will help defray the cost of coverage for small employers with fewer than eight covered employees, if the employer's cost exceeds 1.5% of wages and if such excess is more than five percent of the employer's income before taxes from the business. (3) Temporary Disability Insurance (TDI). The TDI law of Hawaii requires employers to provide temporary disability insurance or sick leave benefits for employees who are unable to work because of a disability, for up to 26 weeks of disability, generally. You can meet your TDI obligations in one of three ways:
Workers do not become eligible for TDI coverage unless they work at least 20 hours a week for at least 14 weeks and earn wages of at least $400 during the four most recently completed calendar quarters. The state will send you Form DC-3 when you register, which will ask you a number of questions about your disability coverage, which you must answer and return. Note that you may require your covered employees to pay up to one-half of the premium cost, but not more than 0.5% of the worker's weekly taxable wages, and not on a wage amount that is more than 1/52 the statewide average annual wage, as determined annually by the Department of Labor and Industrial Relations (currently about $400 a week). For more detailed information regarding your obligations as an employer under the Hawaii workers' compensation, PHC, and TDI laws, contact your insurance carrier or see the contact information for the offices of the Disability Compensation Division of the Hawaii Department of Labor and Industrial Relations, listed in Section VI(a). You can also pick up an employer's packet that includes information on the above types of coverage and other labor issues from the Information Office of the Department of Labor and Industrial Relations. It includes a number of official posters you must post in the workplace and various informational pamphlets on workers' compensation, PHC, TDI, and other employer obligations. (d) State Wage and Hour Laws. Some employees of certain small firms not engaged in interstate commerce are not covered by the federal minimum wage and overtime laws. However, even if few or none of your employees are covered by the federal wage-hour laws, because your firm does less than $500,000 a year in gross sales and the employees in question are not deemed to "...engage in (interstate) commerce...," they will still generally be subject to the Hawaii wage-hour laws, which provide for a state minimum hourly wage that is currently $6.25 an hour, since January 1, 2003. Besides the federal wage-hour posters that you must display in the workplace, you must also display a state wage-hour poster, which you can obtain from the Hawaii Department of Labor and Industrial Relations. In addition to wage-hour laws, most businesses are subject to federal child labor laws, which put numerous restrictions on the working hours and kinds of work in which minors under the age of 18 may engage. Your business must also be cognizant of similar state child labor laws, in Hawaii. In general, while the Hawaii law regulates the employment of children under 18, and requires work certificates to be obtained from the Hawaii Department of Labor and Industrial Relations, no restrictions on working hours apply to 16- or 17-year-old minors under state law. There are considerably more restrictions on hiring 14- and 15-year-olds, and most children under age 14 cannot be hired at all, except for a few specified kinds of jobs, like delivering newspapers. (e) State Occupational Safety and Health Laws. Approximately half of the states have their own OSHA-like agency, charged with administering the state's own occupational safety and health laws. The remaining states have no such enforcement agency, and thus rely instead on the federal Occupational Safety and Health Administration (OSHA) to administer the federal job safety rules within such states. Hawaii is one of the states that has its own OSHA-type agency. To determine if your workplace is in compliance with federal and Hawaii job safety requirements, you may wish to contact the Hawaii Occupational Safety (HIOSH) of the Hawaii Department of Labor and Industrial Relations and request a free on-site safety consultation. You will not be cited for any violations detected, provided that you promptly correct the unsafe conditions. This differs from the rules for consultations by federal OSHA inspectors, who are required to cite you for any violations they find. Note that you must post in the workplace the HIOSH poster, Safety and Health Protection on the Job, or be subject to a possible fine of $1,000. For information on your job safety and health obligations as an employer, required posters, and possible on-site safety consultations, see the contact information for the Division of Occupational Safety of the Hawaii Department of Labor and Industrial Relations, listed in Section VI(a). (f) Other Miscellaneous State Labor Laws. Other Hawaii labor laws you need to be aware of, as an employer, include the following: (1) Wage payments to employees. Employers are generally required to pay wages at least twice each month, although monthly payment is permitted in some cases if a majority of employees vote for it. Each payday, you must furnish each employee a statement of earnings, deductions, net pay, and pay period covered. An employee who is discharged must be paid on the same day, or, if not possible, no later than the next working day. An employee who quits must be paid by the next regular payday. However, if the employee who quits gives at least one pay period's notice of quitting, he or she must be paid all wages owed on the final day of work. (2) Right-to-work laws. About half the states have enacted "right-to-work" laws, which guarantee that no person may be denied employment for refusing to join a union or for not paying union dues, thus banning either "union shop" or "agency shop" agreements, or both. In a union shop, an employee not belonging to a union may be hired but then must join the union, usually within 30 days. In an agency shop, an employee need not join the union but, to remain employed, must pay union dues. Hawaii does not have such a right-to-work law and allows union shop or agency shop contracts between an employer and a union. (3) State anti-discrimination laws. In addition to complying with federal anti-discrimination laws, employers must also be aware of and comply with state civil rights laws in Hawaii, and display a poster informing employees of their rights. Hawaii anti-discrimination and civil rights laws include laws regarding equal pay, regardless of gender, and fair employment laws, generally similar to the federal laws, also covering marital status, sexual orientation, medical condition, and mental or physical disability. You can obtain required posters and informational booklets from the Honolulu office of the Hawaii Department of Labor and Industrial Relations, at the address listed in Section VI(a), or contact the Hawaii Civil Rights Commission at the address listed for it in Section VI(a). (4) Reporting new hires. Under new federal welfare reform laws, employers in all states must now report newly-hired (or rehired) employees to a designated state agency (the Child Support Enforcement Agency for Hawaii employers) within 20 days after the date of hire. See the contact information for new hire reporting in Section VI(a) and the Internet web site address for the CSEA in Section VI(c). (5) Family and Medical Leave Act. Besides the federal Family and Medical Leave Act, which generally applies to companies with over 50 employees, Hawaii has its own such law, which predates the federal law by two years. The Hawaii law applies only to companies with 100 employees or more. Employees must have been on the job for at least six months to be eligible for leave. The Hawaii law is generally similar to the federal. It provides that an employer must allow employees four weeks of leave of absence for family or medical purposes, such as the birth or adoption of a child or a serious health condition of the employee, spouse, child, or parent. The leave can be paid, unpaid, or a combination of both, and either the employer or employee may elect to use accrued sick leave or vacation time as part of the mandated family leave. One important difference in the Hawaii law is the fact that Hawaii recently became the first state to recognize "reciprocal beneficiary" agreements between persons of the same sex, treating domestic partners under such agreements the same as married couples, for purposes of various health programs, including the Hawaii family and medical leave law. VI. STATE SOURCES OF HELP AND INFORMATION (a) Key State Agencies Contact Information. Hawaii, as many states have done in recent years, has set up a "one-stop" center to help your new or existing businesses to obtain all necessary state licenses and permits from a single office, without your having to go from agency to agency to meet all the legal and regulatory licensing requirements. To obtain business registration forms and information on starting or relocating your business in Hawaii, contact:
http://www.state.hi.us/dbedt/start/index.html See also the address for the Business Registration Division of the Department of Commerce and Consumer Affairs, listed immediately below, which is where you should register for your state business license and file any partnership or corporation documents.Addresses and other contact information for other key Hawaii state government agencies mentioned in this book are listed below for your convenience. DEPARTMENT OF COMMERCE AND CONSUMER AFFAIRS. Contact this office for information on:
COUNTY BUSINESS LICENSES. The Department of Finance of each of Hawaii's four counties issues county business licenses. Contact this office in your county at: Hawaii County: Kauai County: TAXES. Obtain state income, General Excise Tax (GET), and other miscellaneous business tax forms, instructions and information from the Hawaii Department of Taxation, which is the main tax collection agency in Hawaii. Also register with this agency as an employer, for state income tax withholding purposes.
STATE LABOR LAWS. Contact the appropriate division of the Hawaii Department of Labor and Industrial Relations about your obligations as an employer under various state labor laws, including:
NEW HIRE REPORTING. Report newly hired or rehired employees within 20 days, by mail or fax, to the Child Support Enforcement Agency (CSEA), at the following address:
Kakuhihewa Building 601 Kamokila Blvd., Suite #251 Kapolei, Hawaii 96707 (808) 692-7029 (808) 692-7001 (Fax) STATE LICENSES. The state has a large number of agencies that require different types of licenses for different kinds of businesses, with fees that vary considerably. See the contact information above for the Business Action Center, which has been set up to help you find your way through this maze of permits and licenses. Also, see the listing above for the Business Registration Division of the Department of Commerce and Consumer Affairs, from whom you will need to obtain your state license for any kind of business. STATE SALES TAX (GET). Obtain your General Excise Tax license and information on the Hawaii General Excise Tax law from the Hawaii Department of Taxation, at the address listed above for that agency. EMPLOYER WITHHOLDING. Contact the Hawaii Department of Taxation to register as an employer, for purposes of Hawaii income tax withholding, at the address listed above for that agency. STATE UNEMPLOYMENT TAX. Contact the Division of Unemployment Insurance of the Hawaii Department of Labor and Industrial Relations, at the address listed for that agency above, to determine whether you are an employer subject to payment of state unemployment taxes, and for registration as an employer for a state employer identification number. WORKERS' COMPENSATION INSURANCE. If you employ workers for whom you must supply workers' compensation coverage, contact the Disability Compensation Division of the Department of Labor and Industrial Relations, at the address listed above for that agency. STATE OSHA PROGRAM. For information on both federal and state occupational safety and health laws that affect you as an employer in Hawaii, contact the Division of Occupational and Health (HIOSH) of the Hawaii Department of Labor and Industrial Relations, at the address listed above for that agency. STATE ANTI-DISCRIMINATION LAWS. For information on state civil rights laws in Hawaii, contact:
BUSINESS INFORMATION AND COUNSELING CENTER (BICC). This center, jointly operated by the SBA, the Service Corps of Retired Executives (SCORE), and Hawaii's SBDC's, offers small business counseling and a reference library that includes computers and audio-visual training facilities. The BICC can help you with creating a business plan, a marketing plan, or loan applications. Open from 8:00 a.m. to 4:30 p.m., it is located at:
(b) Small Business Development Centers. A number of Small Business Development Centers (SBDCs) are located throughout Hawaii to assist you. These centers, usually located on college campuses, provide a wealth of start-up information and sponsor frequent business-oriented seminars. Contact the lead office below for information, or for the location of other SBDCs nearer to you.
(c) Internet Sites. If you have access to the Internet, there is a wealth of state and even local business information provided by state and local governments. All states now have a state government Web page, and most major state agencies also have sites on the Internet where you can obtain useful small business information on matters such as state taxes, financing sources, or the addresses and phone numbers (or e-mail addresses) of various state and federal agencies' offices in Hawaii. Since new sites are appearing constantly, you might also want to search for other Hawaii government Web sites by using one of the popular Internet search engines, such as Excite! or Yahoo. To start your Internet search for Hawaii government information, you may want to begin with the following Internet sites: State of Hawaii Home Page: Hawaii Department of Taxation: Hawaii Small Business Development Center Network: Hawaii Department of Labor and Industrial Relations: Hawaii Venture Capital Association: New Hire Reporting (CSEA): (d) Financing Sources. For information and help on locating financing for your small business, contact the nearest U.S. Small Business Administration (SBA) office in Hawaii, or contact the Business Action Center (listed in Section VI(a)) for information about the Hawaii Capital Loan Program, which provides low-interest loans of up to $1 million to qualified small businesses that cannot obtain conventional financing. The address of the Honolulu SBA office is:
Or, if you are seeking venture capital financing, contact the following private nonprofit organization that encourages growth of venture capitalism and entrepreneurship in Hawaii:
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Copyright © 2000 Michael D. Jenkins
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