The Treasury takes a position on “payment on demand” agreements
Last week, the Treasury Department released the “Green Book,” officially known as the Administration’s General Explanations of Revenue Proposals. Among its proposals, the Green Paper addresses the treatment of pay-on-demand schemes. These arrangements, which have recently grown in popularity, allow employees to access a portion of their salary before the employee’s normal pay date. For this reason, they are often referred to as “earned wage access programs”.
One of the potential tax concerns with these arrangements is that, depending on the design of the program, the employee could be considered to be in “implicit receipt” of their earned wages. This creates payroll withholding and deposit obligations for employers, whether or not the employee receives a salary payment. In addition, the program may cause uncertainty as to how to properly calculate the required FICA tax and income tax withholdings when the employee elects to receive payment of earned wages. For this reason, some third parties designing the programs (which are often app-based) have sought to either structure the programs as loans or avoid the implicit receipt problem by requiring payment of a small fee when salaries won are paid.
The Green Paper proposes that Congress pass legislation amending a number of Code provisions to accommodate these provisions. However, the proposal also confirms the Treasury’s current view that employees generally receive their earned wages if they have “absolute control over when they actually receive their wages.” Additionally, the proposal notes that “[e]Employers who offer on-demand pay arrangements should maintain a daily or miscellaneous pay period and should withhold and pay employment taxes from wages earned by employees on a daily basis.
The proposal notes that few, if any, employers currently treat employees as being implicitly collecting their wages due to the administrative burden of managing day-to-day payrolls. To solve this problem, the Administration proposes that:
- item 7701 be amended to provide a definition of terms of payment on demand;
- Section 3401(b) be amended to provide that on-demand pay arrangements are treated as weekly pay periods, even if employees have access to pay during the week;
- Articles 3102, 3111 and 3301 be amended to clarify that on-demand payment terms are not loans; and
- Section 6302 be amended to provide special deposit rules for demand payment terms.
These changes would come into effect for calendar years and quarters beginning after December 31, 2022.
The administration’s proposal will bring much-needed certainty to an increasingly mainstream arrangement, but will also serve as a warning to employers in the event that Congress does not pass the administration’s proposal. Payroll providers and trade groups have been lobbying the Treasury and IRS for advice on the programs for several years, but to date the advice has not been provided. Employers with pay-on-demand agreements should consider how the administration’s position on applicable law affects them. In addition, employers should consider the changes needed to bring current provisions into compliance with the new law if and when Congress adopts some form of the administration’s proposal. For example, employers with bi-weekly or semi-monthly payrolls may be required to pay weekly if they offer an on-demand payroll arrangement. We will continue to monitor developments.