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On-demand pay can give employees more control of their finances by allowing them to use funds when needed. Theoretically, it can reduce the use of credit cards or payday loans for unexpected expenses, thus reducing interest and payments for employees. The idea is that more control over money can lessen the financial stress that can affect employees’ mental health and productivity.  

The program can be used as a recruiting tool for new employees. When a company wants to stand out as an employer of choice, often benefits like this will be one resource. 

Employers can use it as a retention and engagement tool. For example, employers can combine on-demand pay with ongoing financial wellness programs like budgeting education, financial planning, and savings programs. 

Employers that adopt a pay-on-demand program will need to look carefully at how they fund and account for payroll. When employees can get paid when they ask, employers will need cash on hand to meet the demand, possibly resulting in processing fees from their payroll company or bank. It will also require planning for funding.  

Employers must withhold, report, and pay taxes on wages. Typically, those are done on the same schedule as paydays. On-demand pay could create a need for more frequent deposits and reporting. Employers should consult with a certified public accountant (CPA) or tax attorney knowledgeable in payroll taxes to understand the tax implications for the company. Employers should also let employees know they should consult with an individual tax advisor. 

Another challenge is the Internal Revenue Service’s (IRS's) constructive receipt of income rules. The Internal Revenue Code (IRC) states that an individual is in constructive receipt of wages when the employee has a right to accept the wages without substantial limitation (IRC §451; Treas. Reg. §1.451-2). An individual cannot elect to delay the taxation of income and postpone constructive receipt of that income by just not picking up a check; once the funds are available to the employee, they are considered constructively received. Essentially, any employee’s wages must be taxed, and the employer must report and pay the tax for the period when the employee first has access to the funds, regardless of when employee picks up the check. By having extra checks in a pay period, it complicates the calculation and reporting of taxes.  

Be aware of state, local, and federal wage laws that might come into play. Employers must comply with the law regardless of when they pay an employee. For example, the employer may be in a state where overtime must be calculated daily. To review state payroll laws and forms, access the CCH Multi-State tool in Member Central.   

Employers that process payroll in-house (without a third-party administrator) will need to track all of the above manually.