Early access to wages may require new employment tax analyses.

• Author: Monk, Jonathan A.

Employees desiring access to their wages before their payday via early payment programs and arrangements have left employers wondering whether they need to change their employment tax practices. Employers may not be required to change anything today, but Treasury has taken note and suggested law changes to adapt with the times.

The payroll industry has seen a shift from employees' receiving wages on a fixed pay schedule to having flexibility via "advance pay" and "on-demand" options for early access to their earned wages through banks, payroll providers, and employers themselves. This item briefly summarizes how these early-access options generally operate (although they are rapidly evolving), how employment tax laws might apply, and Treasury's proposal to address ambiguity concerning the tax impact of these types of programs.

Advance pay and on-demand pay arrangement options

Advance pay (AP) programs are generally provided by financial institutions (e.g., banks and credit unions) that credit the account holder's account in an amount equal to the account holder's paycheck, two to three days before the account holder's regularly scheduled pay date. AP is not offered by employers, which are typically unaware (or at least not notified) that their employee is participating in the program because it is offered by an employee's personal financial institution.

Example 1: S is an employee of Company A. S's paycheck is normally direct-deposited into her checking account with Bank A, an AP program provider, on the last day of the month. Bank A is notified on the 28th day of the month that $1,000 will be transferred by Company A's bank to Bank A for deposit on the last day of the month. Under the AP program, Bank A deposits $1,000 into S's checking account on the 29th day of the month, and S can access those funds on that date. An on-demand pay arrangement (ODPA, also known as an "early wage access" program) is a solution that payroll companies or other ODPA service providers offer employers as an enhancement to the employer's payroll schedule. Employers provide the ODPA provider each employee's payroll information (e.g., employment status, wage history, and relevant withholdings). The ODPA provider then permits the employee to withdraw a percentage (or all) of an upcoming paycheck, sometimes as frequently as daily, with the expectation that the ODPA provider will recoup the employee's withdrawn amount on the next regularly scheduled payday. Further...