By Michael L. Cecere, CPA, MST
Gray, Gray & Gray, LLP
If you think a payroll check that is not cashed is “found money” for your business, think again. Any uncashed paycheck requires careful handling and accounting to avoid running afoul of state unclaimed property laws.
A common situation in which a paycheck may go uncashed is when a final check is forwarded to an ex-employee. In some cases, the check may never catch up to a person who relocates. Or the employee may misplace or simply neglect to cash the check.
Even if several months go by and the check is no longer valid, that does not mean the money goes back to the company. You can’t void the check and return the funds to your account. An uncashed paycheck remains a liability for your business. In fact, even if the check is never cashed, many states including Massachusetts, stipulate that such checks become unclaimed property that is protected by state law.
What should you do if an employee fails to cash a paycheck? The American Institute of Certified Public Accountants (AICPA) suggests the following steps be taken:
- Maintain the most accurate and up-to-date information about the check’s owner, such as last known address, telephone number, and e-mail address.
- Void the check and move the funds into an escrow account. Make sure the escrow account is carefully monitored and subject to strict internal controls.
- Pay any payroll tax, Medicare withholding or Social Security tax due.
- Try to contact the payee at regular intervals, such as every three to six months. Document these attempts, when they were made, how they were made (mail, e-mail, phone), and who made them.
If the check remains uncashed (for three years in Massachusetts and up to seven years in other states), it must be reported to the state as unclaimed property. The report (a Form AP-1 for Massachusetts) should be made to the state in which the last known address of the payee is located. If you do not have an address for the payee, file the report in the home state of the business. Most states require businesses and other organizations to file annual statements of unclaimed property.
Unclaimed property, even a single paycheck that goes uncashed, is a complicated issue that must be handled with due diligence and care. It is also important to note that these rules apply not only to uncashed payroll checks but any unclaimed funds, security or property the company holds. If you have any questions about this issue and how to account for unclaimed property, contact your accounting professional, or call Gray, Gray & Gray at (781) 407-0300.