Why are payroll processors suddenly concerned about MTL?
1 Answer
Faisal Khan
Answered 18/Feb/2025
Although payroll processing was often overlooked, a few high-profile fraud incidents have increased scrutiny. Regulators realized that, in many cases, payroll companies physically handle or control client funds (employer remittances for employee wages, taxes, etc.), fitting the definition of “money transmission”.
Generally, if you receive, hold, or control client funds before distributing them to employees or tax authorities, you may be considered a money transmitter. The exact threshold depends on a state’s statutory language.
Many bigger providers—because of their legal resources—chose to register in most or all states as a precaution. Smaller providers often find those licensing and bonding costs too high to manage without certainty.
No, it’s relatively rare compared to other financial fraud. However, even rare incidents can create severe disruption—especially when employee wages are at stake. Because of that, states are paying more attention to payroll service providers.
Yes—some providers implement direct bank-to-employee or bank-to-tax authority transfers. However, confirm if your role in initiating or controlling those transfers might still be considered “money transmission”.
Not necessarily. Enforcement notices have been issued to mid-sized and small firms. Regulators often cast a wide net, and even modest payroll volumes can attract scrutiny.
These groups pool resources to hire lobbyists, track legislation, and advocate for more payroll-friendly regulations. Their efforts can lead to exemptions, clarifications, or reduced burdens in new or revised laws.
Remote work often means employees are spread across multiple states. If your client base includes remote teams, you may need licensing in more jurisdictions than a purely local payroll provider would.
“My Payroll HR” was a widely publicized case where a payroll processor allegedly misappropriated client funds, resulting in reversed direct deposits and unpaid employees. This event prompted regulators to look more closely at the payroll industry as a whole, accelerating MTL enforcement discussions.
Many bureaus use specialized payroll software that identifies each employee’s work state or residence state. If you notice a shift in your clients’ employee locations, that might indicate new MTL obligations.
Potentially. Some providers add a “compliance cost” or “regulatory coverage fee” if they must license in additional states due to a client’s multi-state workforce.
You must research or consult legal counsel to review each relevant state’s definition of “money transmission”. If you have a multi-state workforce, you could be subject to licensing in multiple jurisdictions.