Taxes on Pay Advance

Question for the group. When you give an employee a payroll advance, it is taxed when it goes through payroll.

My question is this -- when it is paid back through payroll deduction, can that deduction be set up as pre-tax or does it have to be after tax?


  • 3 Comments sorted by Votes Date Added
  • A payroll advance is different from a loan. A loan should go through tax free, with the employee paying it back (even if through deductions) tax free.

    A payroll advance is just paying an employee early. They would earn it back over time. The taxes get paid when the money goes to the employee, regardless of when the work is done.

    If you have come to some agreement with the employee where you gave them a large advance that would be paid off over time, then you probably should just handle it by short-paying. For example: Employee earns $1,000 per week. Employee got a $2,000 advance to be paid back $250 per week. In that case, employee would get paid $750 per week until advance is worked off. Just be careful (watch minimum wage laws, etc).

    Good luck!
  • I am just curious under what circumstances you would grant an advance. . ?
  • I call it an advance -- others might call it a loan. In our case, we changed our payroll period dates. We used to pay on the 25th of the month through the end of the month. Then, we changed to paying on the same date but only through mid-month (so everything was paid in arrears). To avoid employees getting a short check, we made both conversion checks for a whole month, which resulted in a half-month "overpayment" to be repaid at the time of separation.
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