Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.
The U.S. Department of the Treasury has released a document to explain the revenue proposals included in President Biden’s FY 2023 proposed Budget. For the second consecutive year, the General Explanations of the Administration's FY 2023 Revenue Proposals, or “Greenbook,”1 contains specific provisions relating to the tax treatment of “on-demand pay” (a/k/a “earned wage access programs”), which generally allows employees to receive a partial payment of earned wages before their regularly scheduled pay dates. The provisions are directed at certain taxpayers, whom the Department claims are “taking aggressive tax positions on the timing of the wage payment for employment tax purposes and the timing of the withholding and deposit of the employment taxes.”
Underlying the Department’s concerns are several longstanding employment tax rules, including those articulating:
- Wages are considered paid when they are actually or constructively received by the employee;
- An employee is in constructive receipt of wages when an amount is set apart or otherwise made available so that the employee may draw upon that amount at any time; and
- When an employee has unfettered control over the date on which they actually receive their wages, they are typically considered to be in constructive receipt of those wages.
Based upon those tax rules, the Department opined:
- Employees with access to an on-demand pay arrangement may be in constant constructive receipt of their wages as they are earned;
- Employers that offer on-demand pay arrangements should maintain either a daily or a miscellaneous payroll period; and
- Employers that offer on-demand pay arrangements should withhold and pay employment taxes on employees’ earned wages on a daily basis.
In reality, however, the Department recognized few, if any, employers or third-party payors treat employees with access to on-demand pay arrangements as being in constant constructive receipt of their wages, because it would be a significant financial and administrative burden on the employers or third-party payors to configure their payroll systems and make payroll deposits on a daily basis. Thus, in the 2023 Greenbook, the Department again recommended Congress amend certain sections of the Internal Revenue Code in order to address the tax issues that arise in connection with earned wage access programs. Specifically, the Department recommended Congress amend:
- Section 7701 of the Code – to provide a definition of an on-demand pay arrangement as an arrangement that allows employees to withdraw earned wages before their regularly scheduled pay dates;
- Section 3401(b) of the Code – to provide that the payroll period for on-demand pay arrangements be treated as a weekly payroll period, even if employees have access to their wages during the week;
- Sections 3102, 3111, and 3301 of the Code – to clarify that on-demand pay arrangements are not loans for federal tax purposes; and
- Section 6302 of the Code – to provide special payroll deposit rules for on-demand pay arrangements.
The proposal would be effective for calendar years/quarters beginning after December 31, 2023.
In light of the foregoing, an area of immediate concern for employers is the Department’s statements that all employers that offer on-demand pay arrangements should be (regardless of whether Congress enacts the proposed amendments to the Code) currently (i) maintaining either a daily or a miscellaneous payroll period; and (ii) withholding and paying employment taxes on employees’ earned wages on a daily basis, in order to comply with pre-existing federal employment tax laws. An employer’s failure to properly withhold and/or pay such employment taxes (i.e., federal withholding tax, FICA and FUTA) could lead to various civil and criminal penalties. Accordingly, employers that offer on-demand pay programs for their employees should consider not only whether they are in compliance with current tax laws, but also the type of revisions to the program that may become necessary, if Congress enacts the Department’s proposals as written.
1 The Greenbook, released every year, includes the administration’s current priorities and recommendations to Congress, relating to its budget and tax proposals. In any particular Greenbook, some proposals may really just be political posturing, and thus, dead on arrival in Congress, while others are more technical in nature and presumably less partisan. Earned wage access contains elements of both, in that technical revisions to the Code are necessary to eliminate any legal ambiguities, but earned wage access itself is a somewhat political issue, as it relates to the timing of payments to employees.