These on-demand pay changes needed, says Treasury

The Treasury Department would like to see federal legislation that’d clarify the tax treatment of on-demand pay arrangements.

The agency spelled out its proposal in the so-called Green Book, released on the same day as President Biden’s FY 2023 budget.

Employers that offer on-demand pay allow employees to access their earned wages before their regularly scheduled pay dates.

Problem is, that can trigger constructive receipt. That’s what Treasury noted in General Explanations of the Administration’s Fiscal Year 2023 Revenue Proposals.

For example, employees may access a portion of their pay every day. In that case, Payroll should withhold and pay employment taxes on a daily basis.

But as the Treasury Department recognized, maintaining a daily or a miscellaneous pay period and configuring payroll systems accordingly would be a financial and administrative burden.

That explains why employers that offer earned wage access consider the amounts as paid on the regularly scheduled pay date. Or they count them as loans.

4 parts of the on-demand pay proposal

Here’s what Treasury aims to see changed starting Jan. 1, 2023:

• First, Treasury seeks to incorporate the definition of on-demand pay into Sec. 7701 of the Internal Revenue Code. It’d read: “an arrangement that allows employees to withdraw earned wages before their regularly scheduled pay dates.”
• Next, earned wage access arrangements should be treated as having weekly payroll periods, even if employees access their wages on a daily basis. To that end, Sec. 3401(b) of the Code would undergo changes.
• In addition, several sections of the Code should be amended to make clear that on-demand pay arrangements aren’t loans.
• Finally, Sec. 6302 of the Code would need to be changed. The Treasury Department says the Code should allow special deposit rules for on-demand pay arrangements.

Employers will want to keep an eye out for these or other changes, as use of earned wage access continues to grow.