[HoosierCPA]

If an employee receives a cash advance at the end of the calendar year and intends to pay it back, lets say in installments over the next 10 paychecks in the following calendar year are the earnings taxed in the year he receives the advance or the following year when he repays it?

FAR - 78
REG - 72,74,71...please just go away REG nobody likes you!
BEC - 82
AUD - Aug 16

[jenpen]

Wouldn't that be treated more as a loan? It would be a receivable on the company's books, so I don't think the individual would claim that as income.

AUD - 56 - 68 - 61 - 9/8/16
REG - 75
FAR - 7/15/16
BEC - TBD

Wiley CPAexcel and NINJA 10 Point Combo

[Juice23]

I'm not sure that a cash advance would be considered taxable income to the employee. I don't think the advance would be considered an expense for the employer, but should be an asset. It's basically a short term loan.

[HoosierCPA]

Excuse me, I may have worded that wrong by calling it a “cash advance”. I mean a payroll advance. Using my personal experience you are correct. Cash advances with my company are given out for employees who go on company trips and needs upfront cash. The accounting behind it is similar to what you say. You credit cash debit a balance sheet account (in our case a suspense account called “employee adv”). When the employees trip is over they turn in their expenses and you pull it out of the balance sheet and expense it and any remaining money is debited into our cash account and credited out of the balance sheet, washing it out of the balance sheet.

I'm talking about someone who actually gets an advance on their earnings, unrelated to any business trip.

FAR - 78
REG - 72,74,71...please just go away REG nobody likes you!
BEC - 82
AUD - Aug 16

[HoosierCPA]

I think I understand what you're saying, just seems odd in an extreme case like someone needing a huge payroll advance like 20K that they would not be taxed on it in the year they received the cash. Maybe I'm just over complicating it!

FAR - 78
REG - 72,74,71...please just go away REG nobody likes you!
BEC - 82
AUD - Aug 16

[Anonymous]

from a tax point of view, wouldn't' they pay taxes on it when they received it and got it reimbursed when they paid it back?

[Juice23]

So let's say someone earns $1,000/month. It's December and they want a cash advance (or “payroll advance”, doesn't really matter what you call it), so you give them $2,000 now with $1,000 to be paid back $100/month over the next 10 months of the next year. How is that not a loan? The money is still earned in the future months when the amount is paid back, and would be considered income when earned, but the employee would not experience any increase in earnings.

Am I missing something else?

[jenpen]

I agree with @Juice23 – even with the further explanation I still think it's a loan. It's no different than going to the bank and receiving an unsecured loan or line of credit. You receive the cash, but it's not taxable income.

AUD - 56 - 68 - 61 - 9/8/16
REG - 75
FAR - 7/15/16
BEC - TBD

Wiley CPAexcel and NINJA 10 Point Combo

[HoosierCPA]

Thanks everyone! Makes perfect sense now!

FAR - 78
REG - 72,74,71...please just go away REG nobody likes you!
BEC - 82
AUD - Aug 16

[TommyTheCat]

if it can be considered a bona fide loan then its not taxable compensation. I suggest you read through those rules…short of it is you need to have a note agreement in place with an acceptable interest rate, ie at least the AFR. Otherwise I would think a payroll advance is taxable comp when received, since individuals are cash basis.

[Earla Riopel (NYCARE)]

For the employer's standpoint:
The 20k is a loan to the employee.
Any worked hours of employee are use to pay part of this loan, until paid.
The employer my might charged a small interest or not.
The employer will record a payroll expense for the amount of the employee's worked during that period.

For the employee's standpoint:
The 20k is a loan from the employer
Any worked hours is part of payments, until the 20k is paid.
The amount the employee worked for, and put towards the original 20k loan, is considered income to the employee.

For the IRS' standpoint:
Whatever the employee's earned and paid (towards the loan), must be reported to the IRS by the employer with the proper payroll deductions, remitted to the taxing authority.

Whatever the employee earned, and paid toward the 20k loan during the year, is considered taxable during the year when the income (used to pay the loan), and must be included as income in Form 1040.

So basically, part of this 20k is considered a loan to both parties, and each time the employee worked, this loan decreases. There are three transactions here: First, a loan agreement to both employer & employee. Second, a payroll expense to the employer and payroll income to the employee. Third, it's considered taxable income income to the employee, remitting deductions from the employer, and the IRS is expecting to get paid, by both!:)

[Juice23]

Good call, @TommyTheCat. I think you may be right. Look into the “Claim of Right” rule. I think there needs to be an agreement in place for this to be non-taxable in the year of receipt. My guess is that some businesses would have a process in place for this to be done without much trouble.

[Author]

Replies