Unexpected expenses, like medical bills and car repairs, aren’t fun. And for many Americans, they can be a big source of financial stress. Most people would have a hard time covering costs that spring up out of nowhere.
So what can you, as an employer, do to help alleviate some of this stress?
One thing you could consider is implementing a work benefit known as pay on demand. Keep reading to see how this flexible payroll solution works and whether it’s a good choice for your business.
What Does Pay On Demand Mean?
Pay on demand is a flexible payroll method that lets your employees access their earned wages before their actual payday.
If an employee wants to cover their expenses before you’ve run payroll, they can request their earnings ahead of time. If not, they’ll get paid in full on the next scheduled payday.
You may also hear pay on demand referred to as on-demand pay, earned wage access (EWA), instant pay, or flexible wages.
To get a better idea of how on-demand pay works, let’s look at an example.
How Does Pay On Demand Work?
Employees can typically request pay on demand through payroll software or a mobile app, which may charge them a small fee for the service.
In most cases, employers that offer earned wage access as a benefit limit the amount that an employee can withdraw ahead of schedule, such as 50% of how much they’ve earned.
This makes it easier for employers to keep their expenses predictable since they know the maximum amount employees can withdraw early.
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Pay On Demand Example
Imagine you have an employee whose car just broke down. They need to pay the repair shop $500 to get their vehicle back so they can commute to work. Your regular payroll isn’t scheduled to run until next week, but your employee already has $1,000 in earned wages.
If you offer on-demand pay, your employee can request the $500 they need and receive the money early to cover the cost of their car repairs. That $500 is deducted from their next scheduled paycheck.
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Should You Use Pay On Demand for Your Business?
The decision to offer on-demand pay depends on how much your workers would benefit from it and whether your business could handle the impromptu cash leaving when employees use the service.
Workers like hourly employees and part-timers have less predictable income, which makes it harder to cover unexpected expenses. If your workforce includes these groups, pay on demand could be a desirable benefit that may attract job candidates and improve employee retention.
You also need to be sure that your business can handle the income withdrawals. Startups and small businesses may need more time to grow before this employee benefit makes financial sense.
Wait until you’re regularly generating a profit and have enough cash on hand before making early wage access available to your employees.
If you have workers’ comp insurance with Hourly, you can make your cash flow more predictable with our accurate pay-as-you-go workers’ comp premiums. Workers’ comp insurance bills are often based on payroll estimates, but Hourly uses real-time data so that you never underpay or overpay.
How Do Taxes Work with On-Demand Pay?
The IRS has a term called constructive receipt, which refers to the day that an employee can access their wages.
Employers are supposed to deduct payroll taxes on the day that the employee constructively receives their wages, which can be more complicated if you provide pay on demand.
To understand how this works, consider this example:
Imagine you have an employee who earns $100 per day, and you pay employees weekly on Fridays.
- Without pay on demand: Your employee receives their whole paycheck via direct deposit every Friday. As a result, their wages are accessible only on Fridays. This means they constructively receive their entire paycheck each Friday.
- With pay on demand: Your employee can access their wages as they’re earned. If they work a full day on Monday, they can access their $100 in earned wages as early as Monday after work. Because of this, your employee constructively receives wages each day, even if they don’t choose to withdraw them early.
So why does this matter?
The IRS says that employers should withhold payroll tax deductions as soon as the employee constructively receives wages. However, it hasn’t yet specifically addressed on-demand pay, where employees can technically access their pay as soon as they’ve earned it.
The IRS says that they plan to address this and provide clearer instructions for employers as early as 2024.
In the meantime, if you offer earned wage access, you may need to set up a daily pay period to withhold taxes and stay compliant with the constructive receipt rules.
Benefits of On-Demand Pay
Here are some of the advantages of earned wage access for employers and employees:
Some ways this type of pay can help employers include:
- Attract more potential hires: Early access to earned wages is a desirable perk. Offering this attractive benefit could help you stand out as an employer and increase your chances of wooing talented workers.
- Improve employee morale: Pay on demand shows that you support your employees when they need it, helping to build trust with your workers. Not to mention, when employees aren’t distracted by financial stress, they’re more engaged at work.
- Retain more employees: If your employees know they can access earned wages on demand, they’re less likely to leave for another job that doesn’t offer the same benefits. Building a competitive benefits package is one thing you can do to reduce employee turnover.
On the employee side, on-demand pay benefits offer several perks that encourage financial wellness. It can help them:
- Deal with emergencies: For employees living paycheck to paycheck, having early access to earned wages can serve as a financial lifeline in an emergency.
- Reduce late fees and interest charges: Flexible wages can help people pay their bills on time. It’s especially helpful for credit card holders because it allows them to avoid late fees and expensive interest charges.
- Lessen the need for high-interest loans: Without on-demand payments, employees may need to take out payday loans to cover unexpected costs. These loans come with high interest rates that could increase your employee’s financial worries.
- Lower stress levels: Unexpected bills, late fees, and interest charges can cause financial stress if employees don’t have a way to pay for them. Employers that offer on-demand pay create an environment where employees feel supported and have the resources to improve their financial well-being.
Drawbacks of On-Demand Pay
While pay on demand has several benefits, there are some potential disadvantages to consider before deciding to offer it. They include:
- Less predictable cash flow: Employers that offer on-demand pay may have a harder time predicting the amount of money they have in their bank account because they don’t know when an employee will need to use pay on demand or how much they’ll withdraw.
- Trouble paying bills on time: If you don’t plan ahead and budget accordingly, this employee benefit could cause cash flow issues and get in the way of you paying your bills on time.
- More time-consuming payroll taxes: As mentioned before, employers can only expect to see clear IRS tax deduction guidelines on on-demand pay in 2024. Until then, you might have to deduct payroll taxes daily so that you don’t break current rules.
How To Find the Right On-Demand Payroll System
You’ll want to look for an on-demand payroll provider that makes it easy for employees to request their wages and minimizes any extra charges associated with instant pay access.
Here are some things to consider when comparing on-demand pay providers.
- Low instant access fees: Some providers charge fees for withdrawing pay early. To keep these costs from adding up, look for a solution that has low or no fees so your employees can get the most out of their benefits.
- Quick transfer time: Opt for providers that allow employees to withdraw money the same day they’ve earned it, so they can pay for unexpected costs without incurring late fees and overdraft charges.
- Automated tax calculations: Choose a solution that automatically calculates tax withholdings and other deductions based on gross wages. This way, employees can only ever withdraw their net wages.
- Good withdrawal limits: Most providers have a predefined limit, so make sure it works for you and your employees.
Pay On Demand Is a Powerful Benefit…if You Have the Cash Flow
Pay on demand is a workplace perk that allows employees to access their earned wages before payday. Workers often withdraw money early to cover unexpected costs, such as healthcare bills or property repairs.
Offering pay on demand signals to your employees that you have their back when things get rough. And over time, that level of trust can positively affect other aspects of your business, such as retention, productivity, and morale.
That being said, if you’re concerned that the impromptu paydays could affect your business’s cash flow, you may want to hold off on offering on-demand payroll for the time being.