Research suggests that more than 60 percent of U.S. workers would like to be able to access their earnings before their regularly scheduled paydays. Responding to this desire, many employers and their payroll providers now offer so-called on-demand pay arrangements that allow employees to receive their wages the same day they earn it.
While on-demand pay may be a valuable recruiting and retention tool for employers, the immediate availability of wages carries with it certain tax implications for employers that may not easily be avoided without updates to the tax laws and regulations.
What Is On-Demand Pay?
On-demand pay, sometimes referred to as "earned-wage access programs," is essentially a new alternative to payday lending—which some consumer advocates have criticized as predatory due to high fees and interest. Unlike payday lending, on-demand pay arrangements are not structured as a loan in the same way and carry fewer fees, if any at all.
On-demand pay services often require employees to specifically request access to wages through a mobile app (not to be confused with mobile apps offered by third-party companies that operate as payday lenders). Some on-demand pay systems only allow money to be deposited into a prepaid debit card issued by the payroll provider.
The IRS Constructive Receipt Doctrine
At the same time, this ease of access could trigger tax obligations due to the Internal Revenue Code's "constructive receipt" doctrine. Under this doctrine, wages are...
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