Biden Budget Plan Would Impose Earned Wage Access Tax Withholding Mandates on Employers

Short Story: A proposal tucked into the Biden Administration’s 2023 budget proposal could disrupt the payroll withholding schedule of employers offering Earned Wage Access (“EWA”) options to employees, forcing them to withhold and pay EWA employment taxes differently from non-EWA employees. 

Long Story: The Biden Administration’s 2023 budget blueprint proposed requiring that employees with access to EWA be treated as if they were paid on a weekly payroll schedule (rather than on their employer’s normal payroll schedule, which may be biweekly or on the 15th/30th of the month). 

What’s the practical impact? While the EWA proposal is sparse on technical details (we’ll need to wait for legislative language to get the technical nitty-gritty), a weekly payroll period may mean that an employer offering EWA would need to withhold employment taxes (such as social security and Medicare taxes and income tax withholdings) from the paycheck of an EWA employee on a weekly basis

A weekly withholding requirement may also speed up an employer’s obligation to pay such employment taxes to the IRS:

  • If an employer is remitting employment taxes on a “semiweekly” basis (which is required for employers who have more than $50,000 in annual employment tax liability), the IRS requires payment a few days following the employee’s payday. For instance, if the employee is considered paid on a Friday, the IRS requires the employer to fork over the withheld employment taxes the following Wednesday. 
  • Using the above example, if an employee with EWA access must be considered paid on a weekly basis, and the employee is considered paid on a Friday, then the employer may need to withhold employment taxes from the worker’s paycheck on a weekly basis, and pay the paycheck’s withholdings the following Wednesday.
  • Assuming the employer’s normal payroll cycle would be every other week (as opposed to weekly), the proposal would likely result in the employer having to manage two different withholding cycles – one for workers with EWA access, and another for non-EWA employees. This would also likely mean two different employment tax payment dates. 

Editorial Comment: sounds like a ton of operational and technology complexity to me, particularly for employers who have systems hard-coded to current withholding practices. 

What in the world is driving this proposal? An IRS doctrine called “constructive receipt” is the culprit behind the plan. Under this doctrine, the IRS considers wages to be paid when they are set apart or made available to the employee, or when the employee has “unfettered” control over the date upon which they receive their wages, thus employment taxes are due to be withheld on such date. 

“Constructive receipt” is EWA in a nutshell. EWA makes a portion of the worker’s earned wages available upon demand before their normal payday, and the worker has control to draw on those wages whenever they’d like.

As a result, the Administration’s proposal argues that employees with EWA access are in daily receipt of their wages, meaning that under a literal interpretation of the employment tax requirements, payroll withholding should be done a daily basis, meaning the clock on the employment tax payment deadline would start ticking the instant the employee received EWA access to their wages. 

The proposal also raises concerns that employers offering EWA are taking overly aggressive legal positions to address the “constructive receipt” issue – such as arguing that EWA is a loan between an employer and employee (which prompts SO many questions on the consumer protection regulatory front, so the cure may be worse than the disease here) or just disregarding the issue entirely.

As such, the Administration indicates that they want to provide certainty to both employers with EWA and the IRS by uniformly requiring that EWA access be treated as being paid weekly. 

Speaking of loans, the budget package would also clarify that EWA is not a loan for employment tax purposes. This clarification apparently would be limited to purposes of employment tax withholding, and wouldn’t extend to the debate over whether EWA is a loan for consumer protection purposes (so don’t get too excited about the “not a loan” clarification). 

So, is this gonna happen? In other words, do I need to worry about this? The budget proposal is just that – a proposal. Presidential budget plans are notoriously aspirational, and represent an Administration’s wish-list. And like any wish-list, they don’t always get what they want (cue Rolling Stones song). The U.S. House and Senate will start to work on their own budget packages, which may or may not include this particular EWA proposal. The question will be is whether the Administration will fight for this proposal, and what Congressional support/opposition aligns behind the measure. 

If nothing else, EWS is clearly on the radar screens of not just consumer protection authorities, but now also tax regulators (who knew?). 

As always, stay tuned. 

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