Often in lean times employers will advance employees part of their wages to help them cover a need.  This is especially true for employees who are paid monthly or have wages paid a week or two in arrears.  So when you make that advance how is it treated for tax purposes?

Technically, if it is an advance on salary, it is treated as a paycheck the day the check is available to the employees.  That means taxes should be withheld and remitted based on the availability date and not on the normal paycheck date.  This is called the constructive receipt doctrine and it applies to all wage payments, including salary advances and overpayments/underpayments of wages that do not cross tax years.  Taxes should be withheld when wages are actually paid, without regard to when the wages were actually earned. 

A below market interest rate loan, not made to an officer, is a different story but it requires a promissory note, regular payments according to a specified repayment schedule and cannot exceed $10,000.00.  Otherwise the interest is imputed and becomes compensation.  A loan cannot be used as a means of tax avoidance, so be careful not to disguise an advance as a loan just to avoid withholding and paying the taxes.

If you have questions about wages and compensation, please contact our payroll tax experts at JamisonMoneyFarmer PC