Can I charge interest on a loan to an Employee?

jscheidter

At times, my company will loan an employee money that is paid back via deductions from the employee's paycheck. Am I allowed to charge the employee interest?

MrCreosote

I guess it could depend on the amount of the loan, but I can't imagine the amount of the interest would be worth the trouble of calculating and collecting it or the ill will it could cause.

marc

You can charge it, but it must be set out in your loan agreement with the EE, which has been signed by both parties. Unless it is a large loan or you want some really high (be careful of usory laws) rate to discourage the borrowing, the amount will not be worth the time and trouble just as MrCreosote suggested.

Margaret Morford

We had an employee loan program and we charged 1/2 per cent over prime. We loaned money when an employee couldn't get a loan anywhere else...and certainly not at 1/2 per cent over prime. We initially funded the program with $10,000 and made all payments back to the fund, including the interest. The fund grew over time and we were also able to make grants to employees that needed food, etc., who were in such dire straits they'd never be able to pay the fund back. We only did loans for unexpected necessities, food, utilities, car repairs, medical bills. No charge cards, telephone bills, etc.

Margaret Morford
theHRedge
615-371-8200
[email]mmorford@mleesmith.com[/email]
[url]http://www.thehredge.net[/url]

Lori B

I think if you are audited, and the IRS sees "loans" they will actively look for interest. If you characterize as payroll advance instead, take all payroll taxes up front and ensure it is paid back within same calendar year, you have more wiggle room. A true loan should have a reasonable rate of interest to keep IRS at bay.

mwild31

I'm late in getting into the discussion, but just wanted to add my two cents. We do charge interest on loans to employees; we end up charging about what the banks would charge for a personal loan. We have the ee sign paperwork & we create an amortization schedule. In addition, we charge $50 bucks just for the loan (very similar to our 401(k) loan except the interest rate there is 3% over prime). Works great & cuts down on the requests...x;-)

Pork

JSCHEIDTER: What in this world made you allow your company (assumption) to be acting like a bank. We from time to time lissen to the ee's concerns and needs and will allow the individual to apply for an advancement of up to x number of weeks of pay. Collection of the advance pay is set based on his ability to pay back and our company to collect over time. Normally the General Manager reserves approval authority to his person, only. One can not charge interest against advanced pay, one can collect advance pay back on terms. I believe any actions that put your company in the banking arena must be supported by the banking rules of commerce!

I am sure the bankers will speak up and call me full of PORK or will support my post and ask me to send them some PORK!
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marc

I am not a banker but I do support your post. You can email or fax the promised Pork to me at your convenience.x:D

Pork

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