The United States Department of the Treasury released its “General Explanations of the Administrations Fiscal Year 2024 Revenue Proposals,” also known as the Greenbook. This year’s Greenbook includes specific provisions related to on-demand pay that may impact your business’s payroll and related tax treatment, if passed. 

What is On-Demand Pay? 

On-demand pay, otherwise known as earned wage access, allows employees to receive partial payment of earned wages before their regularly scheduled pay dates. Similar to payday loans, these arrangements have grown in popularity in recent years. However, unlike payday loans, on-demand pay arrangements are not structured as loans and often carry fewer fees and tax blunders.  

Proposed Changes 

For the second year in a row, the Greenbook includes a proposal to amend the Internal Revenue Service (IRS)‘s IRC 34019(b) to modify the treatment of on-demand payroll for tax purposes.  

On-demand pay is subject to the same tax rules as traditional pay. Under the IRS guidelines, wages are considered paid when the following occurs: 

• Wages are actually received by an employee. 
• When an amount is set apart or otherwise made available to the employee to draw the amount at any time. 
• When an employee has unfettered control over the date on which they actually receive their wages (constructive receipt of wages). 

This approach can create potential tax concerns. When an employer pays wages or an employee constructively receives wages, employers have payroll withholding and depositing obligations. Complicating matters is properly calculating the required Federal Insurance Contributions Act (FICA) tax and income tax withholding when the employee elect to receive a payment of earned wages. 

For federal tax purposes, this proposal would clarify that on-demand pay arrangements are not loans and would be treated as weekly payroll periods, regardless of if the employee had access to their wages during the week. It would also provide special payroll deposit rules for on-demand pay arrangements.  

If passed, the on-demand pay measures would be effective for calendar years beginning after Dec. 31, 2023. While this proposal is unlikely to become law in its current form in the near term, employers with on-demand pay arrangements should consider how the proposed changes could affect their business. 

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At DM Payroll Solutions, we keep you abreast of the latest laws and regulations impacting related payroll obligations. Contact us today to learn about our offerings.