Treasury Proposes Clarifications for On-Demand Pay

In its annual General Explanations of the Administration’s Fiscal Year 2023 Revenue Proposals, the U.S. Department of the Treasury proposed to clarify the tax treatment of “on-demand pay arrangements” (also known as earned wage access (EWA) programs) by providing a standard definition and standard payroll period for them. The proposal also clarifies that on-demand pay arrangements are not loans. The proposal would be effective for calendar years and quarters beginning after December 31, 2022.

While only a proposal at this stage, the explanation section provides insight into how the U.S. Department of the Treasury views the current state of the law, how employers are complying with current laws, and how the law might be changed to provide uniformity and certainty for employees, employers, EWA service providers, and the IRS.

Proposed Changes

The proposal would amend:

• IRC §7701 to define “an on-demand pay arrangement as an arrangement that allows employees to withdraw earned wages before their regularly scheduled pay dates.”
• IRC §3401(b) to treat the payroll period for on-demand pay arrangements as a weekly payroll period, even if employees have access to their wages during the week.
• IRC §§3102, 3111, and 3301 to clarify that on-demand pay arrangements are not loans.
• IRC §6302 to provide special payroll deposit rules for on-demand pay arrangements.

To learn more about federal and state laws, regulations, and information to keep your company's payroll operations in compliance, check out Payroll Source Plus!

Jyme Mariani, Esq., is Managing Editor of Payroll Currently and Senior Manager of Payroll Information Resources for the APA.