Charles Read, CPA, USTCP, IRSAC
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In today’s gig economy, getting paid instantly is a boon for the workers. But are these apps really free to use ? As noted in this article by Wall Street Journal, “apps have a revenue model that eats as much as $3 from a worker’s daily paycheck.”
This is simply a way for certain payroll providers, financial institutions and intermediaries to make more money. None of this will be free. They will either charge the employer or the employer
There are a lot of unanswered questions about demand pay and how to record and tax it. Here are a few that are being hashed out by taxing authorities at all levels. (See California SB 472 or example of how California is addressing demand payroll.)
1. When is on-demand pay really payroll for tax purposes?
• Must it be paid by the employer?
• If a third party pays, can it be payroll?
2. When is on-demand pay really a loan for tax purposes?
3. When is on-demand pay really an advance for tax purposes?
4. When it is on-demand pay is payroll, how are taxes calculated?
• Tables based on day?
• Calculation based on percentages of a period payrolls time?
• Calculation of percentage of a payroll period average total?
• Flat percentage?
• Something else?
• Or a combination?
5. When on-demand payroll is considered payroll when is it taxable to the employee? Is it taxed at the day of receipt or when the rest of the payroll for that period is paid (That could involve different calendar quarters and years)? i.e. Constructive Receipt. How will that choice affect W2’s, 941s, 940s and the like? Does if fact the ability to receive payroll constitute constructive receipt; like the receipt of a physical check does?
6. When is payment deductible for a cash basis employer, when paid to the employee or at the payday of the pay period?
7. If the employer sets up a true on-demand only payroll system and the employee lets earnings accumulate past what would be the normal payday as a savings mechanism, or to create a fund for larger ticket items, or just because, what are the tax implications?
8. If an employee ends up in the negative (having taken out more demand pay disbursements than earned) at the end of the pay period was some of what he received really payroll or does it have to be reclassified as a loan or even a gift from the employer changing the tax-ability of both parties to the equation? Is there then a 1099 for unearned income?
9. If paid by a third party and the payment is guaranteed back to the third party out of the employee’s paycheck; is it a loan or is it advance payroll subject to tax withholding, depositing and reporting? If it is payroll who reports it the employer or the third party?
10. How will daily ”tip out” payments, to tipped employees be affected by any new regulations?
11. Minimum wage aspects of fees if they are charged to the employee whether payroll, advance or loan?
12. Are the fees charged by third parties fees or interest subject to usury laws? California is proposing (S.B. 472) exempting on-demand payroll from credit transaction rules, limits on fees and more.
13. How should on-demand payments be represented on the earning statement? How should the payments be reflected in the YTD aggregations?
14. Deductions are calculated how?
• Consider child support; does it all come out of the on-demand payroll payment or is it spread over the pay period in some way. If the employee takes out all available pay without paying full child support and quits who is responsible for the unpaid child support?
• If there is a flat dollar local tax is it prorated over the pay period or taken out of the first on-demand payroll payment?
Until these questions and more are answered it pays to beware of these expensive processes and the real associated risks of being on the wrong side of regulations when issued.
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