Sec. 178.1. Liability of third parties paying or providing for wages

Tax Law, § 678

(a) Personal liability in case of direct payment of wages.

A lender, surety or other person:

(1) who is not an employer and who is not a fiduciary, agent or other person authorized to perform acts required of employers with respect to an employee or group of employees; and

(2) who pays wages directly to such employee or group of employees, employed by one or more employers, or to an agent on behalf of such employee or employees;

is liable for payment of the amount equal to the sum of the New York State personal income taxes required to be deducted and withheld from those wages by the employer and interest from the due date of the New York State employer's return relating to such New York State personal income taxes for the period in which the wages are paid.

Example:

Pursuant to a wage claim, a surety company paid an employee of a construction company his net wages. This was done in accordance with the surety company's payment bond covering a private construction job on which such employee was employed by the construction company. If the construction company fails to make timely payment or deposit of the New York State personal income tax required to be deducted and withheld from such employee's wages, the surety company becomes personally liable for the amount equal to the amount of the unpaid New York State personal income taxes, plus interest upon such amount from the due date of the construction company's New York State employer's return.

(b) Personal liability where funds are supplied.

(1) General.

A lender, surety or other person who is not an employer and who is not a fiduciary, agent or other person authorized to perform acts required of employers who:

(i) advance funds to or for the account of an employer for the specific purposes of paying wages of the employees of that employer; and

(ii) at the time the funds are advanced, has actual notice or knowledge that such employer does not intend to, or will not be able to, make timely payment or deposit of the amounts of New York State personal income tax required to be deducted and withheld by such employer from such wages;

is liable for payment of the amount equal to the sum of the New York State personal income taxes which are required to be deducted and withheld from such wages by such employer and which are not paid over to the Tax Commission by the employer, and interest from the due date of the New York State employer's return relating to such New York State personal income taxes. However, the liability of such lender, surety or other person for such New York State personal income taxes shall not exceed 25 percent of the amount supplied by such lender, surety or other person for the payment of wages. The preceding sentence and the second sentence of subsection (b) of section 678 of the Tax Law limit the liability of a lender, surety or other person arising solely by reason of section 678 of the Tax Law, and such limitation does not limit the liability which the lender, surety or other person may incur to New York State as a third-party beneficiary of an agreement between the lender, surety or other person and the employer. The liability of a lender, surety or other person does not include penalties imposed on the employer.

(2) Ordinary working capital loan. The provisions of this subdivision and subsection (b) of section 678 of the Tax Law do not apply in the case of an ordinary working capital loan made to an employer, even though the person supplying the funds knows that part of the funds advanced may be used to make wage payments in the ordinary course of business. Generally, an ordinary working capital loan is a loan which is made to enable the borrower to meet current obligations as they arise. The person supplying the funds is not obligated to determine the specific use of an ordinary working capital loan or the ability of the employer to pay the amounts of New York State personal income tax required to be deducted and withheld. However, the provisions of the subdivision and subsection (b) of section 678 of the Tax Law are applicable where the person supplying the funds has actual notice or knowledge at the time of the advance that the funds, or a portion thereof, are to be used specifically to pay net wages, whether or not the written agreement under which the funds are advanced states a different purpose. Whether or not a lender has actual notice or knowledge that the funds are to be used to pay net wages, or merely that the funds may be so used, depends upon the facts and circumstance of each case. For example, a lender, who has actual notice or knowledge that the withheld New York State personal income taxes will not be paid, will be deemed to have actual notice or knowledge that the funds are to be used specifically to pay net wages where substantially all of the employer's ordinary operating expenses may be supplied pursuant to an agreement described as a working capital loan agreement.

(c) Definitions.

(1) Other person.

As used in this section, the term other person means any person who directly pays the wages or supplies funds for the specific purpose of paying the wages of an employee or group of employees of another employer. It does not include a person acting only as agent of the employer or as agent of the employees.

(2) Actual notice or knowledge.

For purposes of this section and section 678 of the Tax Law, an organization is deemed, in any transaction, to have actual notice or knowledge of any fact from the time the fact is brought to the attention of the individual conducting the transaction, and in any event from the time the fact would have been brought to the individual's attention if the organization had exercised due diligence. An organization exercises due diligence if it maintains reasonable routines for communicating significant information to the person conducting the transaction and there is reasonable compliance with the routines. Due diligence does not require an individual acting for the organization to communicate information unless such communication is part of his regular duties or unless he has reason to know of the transaction and that the transaction would be materially affected by the information.

(d) Payment of New York State personal income taxes and interest.

(1) Procedure for payment. A lender, surety or other person may satisfy the personal liability imposed upon him by section 678 of the Tax Law by payment of the amount of New York State personal income tax and interest due, accompanied by a letter of explanation. In the event the lender, surety or other person does not satisfy the liability imposed by section 678 of the Tax Law, the Tax Commission may collect the liability by appropriate civil proceeding commenced within six years after assessment of the New York State personal income tax against the employer.

(2) Effect of payment.

(i) General. A lender, surety or other person paying the amounts of New York State personal income tax required to be deducted and withheld as a result of section 678 of the Tax Law and this section is not required to file a New York State employer's tax return with respect to those wages, or furnish annual New York State wage and withholding tax statements to the employees.

(ii) Amounts paid by a lender, surety or other person. Any amounts paid by the lender, surety or other person to the Tax Commission pursuant to section 678 of the Tax Law and this will be credited against the liability of the employer on whose behalf those payments are made and also reduces the total liability imposed upon the lender, surety or other person under section 678 of the Tax Law and this section.

(iii) Amounts paid by the employer. Any amounts paid to the Tax Commission by an employer and applied to his liability reduces the total liability imposed upon that employer. Such payments will also reduce the liability imposed upon a lender, surety or other person under section 678 of the Tax Law, except that such liability will not be reduced by any portion of any employer's payment applied against the employer's liability which is in excess of the total liability imposed upon the lender, surety or other person under section 678 of the Tax Law.

(e) New York State employer's returns required by employers and statements for employees.

This section does not relieve the employer of the responsibilities imposed upon him to file the New York State employer's returns and supply the statements required under article 22 of the Tax Law and this Subchapter.

(f) Time when liability arises.

The liability under section 678 of the Tax Law and this section of a lender, surety or other person paying or supplying funds for the payment of wages is incurred on the last day prescribed for the filing of the New York State employer's return of withheld New York State personal income tax (determined without regard to any extension of time) in respect to such wages.