[OSSSA218] Payroll Advances/Draws and Withholdings

[Pamella Johnson]

Good morning Section 218 Employers:

A recent question from one of our public employers prompted guidance from the IRS. It is a timely reminder as the end of 2017 approaches.

QUESTION:         At what point are FICA and FIT withheld from a payroll advance or draw? At the next regular pay date or at the time of
                                the advance?

IRS ANSWER:     The wages are taxable when paid. You cannot make the payout/advance without withholding the applicable amount
                                of FIT and FICA at the time the money is made available to the employee.

Refer to IRS Publication 525 for a short discussion on constructive receipt.

Salary Advances and Overpayments
Because wages are taxable when constructively received, regardless of when earned, a salary advance or overpayment of wages is taxable when paid to the employee, even though wages have not been earned. When an employee repays an overpayment or advance, his or her gross taxable wages will be reduced by the amount of the repayment provided the repayment occurs in the same tax year as the advance.

If a salary advance is repaid in a year after the year in which the advance is paid, the repayment cannot be deducted from gross wages. Instead, the "claim-of-right-rule" applies. Under the claim-of-right rule, complex reporting rules apply for both the employee and the employer.

With thanks to our IRS partners for this clarification,

Pamella
Pamella Johnson
Oregon State Social Security Program


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