The Complete Hawaii Employer Payroll Guide

1. Hawaii Payroll: The Five Layers

Running payroll in Hawaii means navigating five separate tax and withholding layers simultaneously — plus three mandatory employer insurance programs. Most mainland payroll software handles federal taxes adequately but struggles with Hawaii's unique requirements. Understanding what each layer involves is the first step to staying compliant.

2. Federal Payroll Taxes

Federal payroll taxes apply to every employer in every state, including Hawaii. They include three components:

Federal Income Tax Withholding

Employers must withhold federal income tax from each employee's paycheck based on the employee's W-4 form (Employee's Withholding Certificate). The amount withheld depends on the employee's filing status, allowances, and wage level. Withholding tables are published annually by the IRS in Publication 15-T.

FICA: Social Security and Medicare

The Federal Insurance Contributions Act (FICA) requires both the employer and employee to contribute:

• Social Security: 6.2% from the employee + 6.2% employer match = 12.4% total (applies up to the Social Security wage base: $176,100 for 2025)
• Medicare: 1.45% from the employee + 1.45% employer match = 2.9% total (no wage base limit)
• Additional Medicare Tax: 0.9% withheld from employees earning over $200,000 (no employer match)

FUTA: Federal Unemployment Tax

Employers pay FUTA at 6.0% on the first $7,000 of each employee's wages. Employers who pay their state unemployment taxes on time receive a credit of up to 5.4%, reducing the effective FUTA rate to 0.6%. Hawaii employers generally qualify for this credit.

3. Hawaii State Income Tax Withholding

Hawaii has its own income tax withholding system that operates separately from federal withholding. Key details:

HW-4 Form

Employees complete the HW-4 (Hawaii Withholding Exemption Certificate) — Hawaii's equivalent of the federal W-4. This is a separate form; the federal W-4 does not substitute for the HW-4. All new employees must complete an HW-4 before their first paycheck. If no HW-4 is on file, withhold at the highest rate (Single, 0 exemptions).

Hawaii Income Tax Rates (2026)

Hawaii has one of the most progressive income tax structures in the country, with 12 brackets ranging from 1.4% to 11%. The top rate of 11% applies to taxable income over $200,000 for single filers ($400,000 for joint).

HW-14: Hawaii Withholding Tax Return

Most Hawaii employers file and remit state withholding monthly using Form HW-14. The filing and payment deadline is the 15th of the month following the pay period. Employers who withheld less than $40,000 in the prior year may qualify for quarterly filing.

Annual Reconciliation: HW-3

At year-end, employers file Form HW-3 (Annual Summary and Transmittal of Hawaii Income Tax Withheld) along with employee W-2 forms. The deadline is January 31.

4. Hawaii Unemployment Insurance (UI) Tax

Hawaii's Unemployment Insurance program is administered by the Hawaii Department of Labor and Industrial Relations (DLIR). All covered employers must register and pay UI tax.

Who Must Pay

Employers who paid wages of $1,500 or more in any calendar quarter, or who employed one or more workers in 20 or more weeks during the calendar year, must pay UI tax.

Tax Rates

New employers are assigned a rate of approximately 2.4% for their first few years. After three years, rates are based on your experience rating — your claims history relative to your industry. Rates range from 0% to 5.6%. The taxable wage base for 2025 is $56,700 per employee.

Filing: UC-B6

UI tax is reported and paid quarterly using Form UC-B6, due by the last day of the month following the quarter end (April 30, July 31, October 31, January 31).

5. Temporary Disability Insurance (TDI)

Hawaii is one of only five states that requires employers to provide Temporary Disability Insurance. TDI covers employees who are unable to work due to a non-work-related illness, injury, or pregnancy.

Who Must Be Covered

Employees who have at least 14 weeks of Hawaii employment during each of which they were paid for 20 or more hours per week, and who earned at least $400 in the 52 weeks preceding disability, must be covered.

What TDI Pays

58% of average weekly wages beginning on the 8th day of disability, for up to 26 weeks. The benefit is tax-free to the employee.

Cost Sharing

Employers can deduct up to 0.5% of weekly wages from employees to help cover TDI premiums. The employer pays the remainder. Some employers absorb the full cost as a benefit.

How to Get Coverage

Purchase from a state-approved TDI carrier. There is no state TDI fund — coverage must come from the private market. PDS works with your TDI carrier to ensure deductions are correctly calculated and withheld each pay period.

6. Prepaid Health Care Act (PHCA)

Enacted in 1974, Hawaii's Prepaid Health Care Act was the first employer health insurance mandate in U.S. history — predating the ACA by 36 years. It requires employers to provide qualifying health insurance to eligible employees.

Who Is Covered

Employees who work 20 or more hours per week for four consecutive weeks AND earn a monthly wage of at least 86.67 times the current Hawaii minimum hourly wage must be offered coverage.

Employee Cost Cap

The employee's share of the health insurance premium cannot exceed 1.5% of gross wages. If the plan costs more, the employer absorbs the difference. This is stricter than the ACA's affordability standard.

Approved Carriers

Coverage must come from a health care contractor approved under the PHCA. The major carriers in Hawaii are HMSA (Hawaii Medical Service Association — Blue Cross Blue Shield of Hawaii), Kaiser Permanente Hawaii, and UHA (University Health Alliance).

7. Workers' Compensation Insurance

Every Hawaii employer with one or more employees must carry workers' compensation insurance. There are no exceptions for small employers.

What It Covers

Workers' comp covers medical expenses and wage replacement (66⅔% of average weekly wages) for employees injured on the job or who develop a work-related illness. There is a 3-day waiting period, waived retroactively if disability exceeds 14 days.

How to Get Coverage

HEMIC (Hawaii Employers Mutual Insurance Company) is Hawaii's largest workers' comp insurer, built specifically for local employers. Most Hawaii businesses purchase workers' comp through a licensed broker.

Payroll Connection

Workers' comp premiums are calculated as a percentage of total payroll by job classification code. Your insurer conducts an annual premium audit using your actual payroll records. Accurate, well-categorized payroll records directly affect what you pay — and whether your audit results in a credit or a surprise bill.

Penalty for Non-Compliance

Operating without workers' comp can result in fines up to $10,000, a stop-work order forcing your business to close, and personal criminal liability.

8. Pay Stub Requirements

Hawaii employers must provide employees with a written itemized statement for each pay period. Under Hawaii Revised Statutes §387-6, pay stubs must include:

• Employee's name
• Date of payment and pay period covered
• Gross wages earned
• Each deduction and its purpose (federal tax, state tax, FICA, TDI, health insurance, etc.)
• Net wages paid
• Regular and overtime hours worked (for hourly employees)

Electronic pay stubs are permitted as long as employees can access and print them. PDS generates complete, Hawaii-compliant pay stubs for every employee every pay period.

9. W-2s, 1099s & Year-End Filing

W-2 Deadline

Employers must provide W-2 forms to all employees by January 31. The same deadline applies for electronic W-2 delivery. Submit copy A (federal) to the SSA and copies to the Hawaii Department of Taxation along with HW-3 by January 31.

1099s for Contractors

If you paid an independent contractor $600 or more during the year, you must file Form 1099-NEC with the IRS and provide a copy to the contractor by January 31. Hawaii also requires state 1099 reporting.

ACA Reporting (50+ FTE Employers)

Employers with 50 or more full-time equivalent employees must file Forms 1094-C and 1095-C annually to report health insurance offers and coverage. Hawaii's PHCA predates the ACA but does not exempt large employers from ACA reporting requirements.

10. Key Payroll Deadlines

11. Penalties for Getting It Wrong

Hawaii payroll penalties are not theoretical — the state and federal government actively assess them. These are the most common and most painful:

12. Why Hawaii Businesses Choose PDS

Pacific Data Services has handled payroll for Hawaii businesses since 1969. Not a franchise. Not a mainland company with a local sales rep. We were built in Hawaii, for Hawaii — by people who understand that TDI, PHCA, workers' comp, and HW-14 are not optional extras. They're the cost of doing business here.

What PDS Does for You Every Pay Period

• Calculates all federal and state tax withholding accurately
• Calculates and withholds TDI employee contributions (up to 0.5% of wages)
• Calculates PHCA health insurance contributions per employee (capped at 1.5% of wages)
• Generates Hawaii-compliant pay stubs with full itemization
• Makes federal tax deposits via EFTPS on your behalf
• Prepares and files HW-14 (Hawaii monthly withholding)
• Prepares and files UC-B6 (Hawaii UI quarterly)
• Maintains payroll records organized for workers' comp audits

What PDS Does at Year-End

• Prepares and distributes W-2s to all employees by January 31
• Files HW-3 and W-2 copies with the Hawaii Department of Taxation
• Prepares 1099-NEC forms for independent contractors
• Prepares ACA forms (1094-C, 1095-C) for qualifying employers
• Provides complete payroll history and records for your accountant