Last week, the Treasury Department released the “Green Book,” formally known as the General Explanations of the Administration’s Revenue Proposals. For the second year in a row, the Green Book addresses the treatment of “on-demand” pay arrangements also known as “daily pay” or “earned wage access programs.” These arrangements permit employees to access a portion of their earned wages in advance of the employee’s normal pay date.
These programs raise potential tax concerns because, depending upon the program design, the employee could be considered to be in “constructive receipt” of their wages as soon as they earn them. This creates payroll withholding and depositing obligations for employers regardless of whether the employee actually receives a wage payment. In addition, the program can cause uncertainty regarding how to properly calculate the required FICA tax and income tax withholdings when the employee elects to receive a payment of earned wages. For this reason, some programs (which are often app-based) are structured as loans or attempt to avoid the constructive receipt issue by requiring the payment of a small fee when the earned wages are paid.