Considering Same-Day Pay? You Better be Ready to Pay Uncle Sam on Time.

Many employers are utilizing or considering same-day pay and daily pay-type arrangements that allow their employees early access to their wages, in exchange for a fee being paid by the employee to the same-day pay vendor.  In addition to such arrangements having the risk of regulatory oversight due to payday loan terms that are imposed on unsuspecting employees, there are wage and hour and tax implications that are often overlooked by employers in their desire to provide cash-strapped employees with convenient wage access.

In this article, we discuss federal employment tax rules.  As background information, the IRS expects employment taxes to be deposited by employers based on the date that the employee was actually paid, or “constructively” paid.  From the IRS’s standpoint, an employee is considered to be in constructive receipt of wages when an amount is set apart or otherwise made available so that the employee may draw upon that amount at any time or when an employee has unfettered control over the date on which the employee actually receives their wages.   Due to these “constructive receipt” concerns, employment taxes may be due to the federal government for same day pay on an earlier basis than most employers are paying such wages now. 

This year’s “Green Book,” published by the Treasury Department maintains that employees with early access to wages via an on-demand pay arrangement may be in constant constructive receipt of their wages.  Thus, the IRS affirmatively recognizes that this is a problem. As such, Treasury advises employers to withhold and pay employment taxes on employees’ earned wages on a daily basis.  

To ease employers’ burdens associated with same day arrangements, the Treasury has proposed amending the Internal Revenue Code (“IRC”) to address these on-demand pay programs.  The Treasury would treat any same-day pay as having been paid on a weekly pay period, so that employment tax deposits would be due to the IRS from that “weekly pay” date. 

The Treasury’s proposal would amend the IRC as follows:

  1. Code Sec. 7701 to provide a definition of an on-demand pay arrangement as an arrangement that allows employees to withdraw earned wages before their regularly scheduled pay dates.
  2. Code Sec. 3401(b) to provide that on-demand pay arrangements are treated as a weekly payroll period, even if employees have access to their wages during the week
  3. Code Sec. 3102, Code Sec. 3111, and Code Sec. 3301 to clarify that on-demand pay arrangements are not loans
  4. Code Sec. 6302 to provide special payroll deposit rules for on-demand pay arrangements

If and until these changes are implemented, employers utilizing same-day programs are strongly cautioned to consult their accountants or tax attorneys to ensure that they do not run afoul of the employment tax rules.