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TAX CLINIC

it is offered by an employee’s personal services previously provided. Com-
An on-demand financial institution. pany A’s employees decide whether
to establish an account with Pay-
pay arrangement Example 1: S is an employee of dayX, through which they can access
(ODPA, also known Company A. S’s paycheck is nor- money before Company A distributes
as an ‘early wage mally direct-deposited into her paychecks on Friday. Employee C,
who has an account with PaydayX,
checking account with Bank A, an
access’ program) AP program provider, on the last withdraws $100 from his PaydayX
is a solution that day of the month. Bank A is notified account before a Friday. Depending
on the 28th day of the month that
on the ODPA, Employee C may pay
payroll companies or $1,000 will be transferred by Com- a fee to access this money. On the
other ODPA service pany A’s bank to Bank A for deposit next Friday, $100 is directed from
Company A’s bank to PaydayX,
on the last day of the month. Under
providers offer the AP program, Bank A deposits and the remainder of Employee C’s
employers as an $1,000 into S’s checking account on paycheck is deposited into Employee
enhancement to the the 29th day of the month, and S can C’s bank account (which may also be
with PaydayX).
access those funds on that date.
employer’s payroll
An on-demand pay arrangement
schedule. (ODPA, also known as an “early wage Currently available guidance
Secs. 3102 and 3402 and associated reg-
access” program) is a solution that pay- ulations generally require employers to
taken note and suggested law changes to roll companies or other ODPA service deduct and withhold employment taxes
adapt with the times. providers offer employers as an enhance- (respectively, Federal Insurance Contri-
The payroll industry has seen a shift ment to the employer’s payroll schedule. butions Act (FICA) taxes and federal
from employees’ receiving wages on a Employers provide the ODPA provider income tax withholding) as and when
fixed pay schedule to having flexibility each employee’s payroll information wages are paid, whether actually or con-
via “advance pay” and “on-demand” (e.g., employment status, wage history, structively. Under Regs. Sec. 31.3402(a)-
options for early access to their earned and relevant withholdings). The ODPA 1(b), wages are constructively paid when
wages through banks, payroll providers, provider then permits the employee they are credited to the account of, or
and employers themselves. This item to withdraw a percentage (or all) of set apart for, an employee, so that the
briefly summarizes how these early- an upcoming paycheck, sometimes as employee may draw upon those wages
access options generally operate (al- frequently as daily, with the expectation at any time, although not then reduced
though they are rapidly evolving), how that the ODPA provider will recoup the to possession.
employment tax laws might apply, and employee’s withdrawn amount on the Sec. 3401(b) defines payroll periods
Treasury’s proposal to address ambiguity next regularly scheduled payday. Further, as the ordinary periods in which wage
concerning the tax impact of these types any excess withdrawals would not be payments are made and miscellaneous
of programs. settled by the employer but are instead payroll periods as those “other than a
typically resolved between the ODPA daily, weekly, biweekly, semimonthly,
Advance pay and on-demand provider and the employee. monthly, quarterly, semiannual, or an-
pay arrangement options nual payroll period.” Employees can only
Advance pay (AP) programs are gener- Example 2: Company A agrees to have one payroll period with respect to
ally provided by financial institutions participate in an ODPA sponsored wages paid by any one employer. For
(e.g., banks and credit unions) that by PaydayX, an ODPA provider. example, if an employer ordinarily pays
credit the account holder’s account in Company A provides PaydayX a particular employee for each calendar
an amount equal to the account holder’s with certain information about its week at the end of the week but the em-
paycheck, two to three days before the employees, including their normal ployee receives a payment in the middle
account holder’s regularly scheduled weekly pay, normally withheld of the week, the payroll period is still the
pay date. AP is not offered by employ- employment taxes, and other pretax calendar week. Further, if the employee
ers, which are typically unaware (or at and after-tax withholdings (e.g., Sec. is paid at the end of a three-week as-
least not notified) that their employee 401(k) plan contributions). Company signment, the payroll period is still the
is participating in the program because A pays its employees each Friday for calendar week, and the wage payment

10 February 2023 The Tax Adviser