Constructive Receipt and Earned Wage Access

Estimated reading time: 6 minutes

Constructive receipt is about the timing of income, not the source of income.
Image: Constructive receipt is about the timing of income, not the source of income.

In recent years, an income tax regulation called constructive receipt has been used as a misleading sales tactic to differentiate Earned Wage Access vendors. 

The implication made by some vendors is that an Earned Wage Access (EWA) transfer from an employer-funded account creates an immediate requirement for reporting and remission of withholding by the employer. Therefore, some vendors incorrectly state that an employer-funded EWA model establishes a tax liability risk for the employer that their provider-funded model does not. 

For years, the IRS has privately stated that it does not matter who provides the EWA funds. Constructive receipt is about the timing of income, not the source of income. Additionally, U.S. Treasury has recently proposed amendments to the IRS code indicating the agency is seeking clarity on EWA solutions. (See Proposed Amendments by U.S. Treasury below.)

Using constructive receipt to erroneously differentiate EWA vendors is a marketing ploy. These vendors may attempt this tactic to redirect focus from glaring non-compliance with current Federal and State Banking and Labor laws and regulations.

Constructive Receipt Background

Constructive receipt is an income tax doctrine determining when a taxpayer, who uses cash-basis accounting, has received income. 

The United States Tax Court established the constructive receipt doctrine to “determine the timing of receipt of income items.” The original case, Viet v. Commissioner, addressed the proper year a taxpayer was required to pay taxes on deferred executive compensation.

§1.451–2 Constructive receipt of income:

“(a) General rule. Income, although not actually reduced to a taxpayer’s possession, is constructively received by him in the taxable year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the taxable year if notice of intention to withdraw had been given. However, income is not constructively received if the taxpayer’s control of its receipt is subject to substantial limitations or restrictions

Constructive Receipt and Employees Who Receive Tips

Many examples exist of employees being paid wages without reporting and remission of withholdings until payday. For example, tips are paid daily to restaurant servers. And according to IRS requirements, those tips are accounted for the Monday following the date earned. Therefore, tax withholding doesn’t happen until the following pay cycle.

Earned Wage Access Background

Earned Wage Access (EWA) is a benefit service that allows employees access to their earned wages between pay periods.

FlexWage received a patent for the technology behind EWA in 2010. Since then, FlexWage has met with numerous legal and accounting firms, large payroll providers, corporate enterprises, and regulatory agencies. Never at any of these meetings (or during the 12 years of our operating EWA programs) was the constructive receipt issue highlighted as a risk nor brought up by any major marketplace player or regulatory entity. 

In 2015, the United States Treasury and National Economic Council (NEC) invited FlexWage to the White House to discuss EWA and financial inclusion, empowerment, and education solutions. Notably, during that visit and several other meetings and interactions like it, constructive receipt has never been identified as an issue.  

FlexWage Earned Wage Access

Accurate Net Earned Wages

The FlexWage Earned Wage Access solution, OnDemand Pay, integrates with an employer’s human capital management (HCM) software to receive accurate individual employee-level data. This integration ensures that all deductions, including taxes, withholding, benefits, and garnishments, are factored into the current net wages.  

Administrative Controls

The FlexWage OnDemand Pay administrative controls govern the allowable percentage of wages available for transfer.  This adjustable control ensures that employees never access more than the net pay they have earned. As a result, a typical FlexWage user accesses only 25% of their net earned wages less than one week before their scheduled pay date. (Payday Is typically one week in arrears at the end of the pay cycle). 

FlexWage EWA and Constructive Receipt

The FlexWage EWA benefit includes tax and other withholdings in the net wage calculation. Taxes get paid on the originally scheduled pay date. Therefore, the limitation in earned wages received and the difference of a few days in reporting and remittance is not an issue.

Additionally, compared to income from tips FlexWage EWA:

>> Operates more accurately on a net basis

>> Is used less frequently

>> Represents only a fraction of the more than 60% of total income that tips represent.

Proposed Amendments by The U.S. Treasury

Recently, several amendments have been proposed to the IRS code by U.S. Treasury regarding all EWA solutions:

>> Define on-demand pay arrangements.

The IRS definition may be different from other regulatory agencies at the federal and state level.

>> Clarify that on-demand pay arrangements are not loans.

Regardless of who is providing the funds, all EWA solutions will be viewed the same by the IRS. However, this will have no impact on the existing federal and state lending laws.

>> Provide that on-demand pay arrangements be treated as weekly payroll periods, even if employees have access to wages during the week.

>> Provide special deposit rules for on-demand pay arrangements.

These amendments will pressure some EWA vendors to be more transparent with clients and consumers regarding their EWA models and force some to change their models and fee structures.

The True EWA Differentiation: Regulatory Compliance and Patented Technology

Unlike other EWA vendors, FlexWage has and continues to carefully research and validate compliance with Federal and State laws and regulations. As a result, FlexWage is compliant with the following regulations. Can your current or prospective EWA provider confirm their compliance with these regulations?

Consumer Financial Protection Bureau (CFPB) Regulations

1. A payroll card/wallet is not linked to a loan (Per CFPB/Reg Z) 

Fair Labor Standards Act (FLSA) Regulations

1. No third-party ACH payments to employees (a payroll intercept process that creates a potential for delay in receipt of payroll funds.)

2. EWA shows as a line-item deduction on the wage statement 

3. EWA benefit program includes taxes in the net wage calculation

U.S. and State Department of Labor (DoL) Regulations

1. EWA Is an allowable wage deduction (verify terms and conditions and state DoL laws)

2. EWA does not violate DoL wage assignment

3. A payroll card/wallet is not mandatory (per Federal and State DoL regulations)

Federal and State Financing Laws

1. EWA is not considered a loan (per state financing laws)

2. EWA repayment and direct deposit withdrawals do not create overdraft fees

3. EWA fees are not considered junk fees (verify state and federal regulatory laws)

State Money Transmitting Licensing Requirements

1. No issues with licensed money transmittal (per state money transmitting licensing requirements)

Compliant, Low-Risk, and Sustainable

In conclusion, as with any software selection process, due diligence is crucial to ensure the best selection of Earned Wage Access benefit program.

When evaluating an Earned Wage Access solution:

1. Ask questions

2. Involve your legal counsel and compliance teams

3. Ensure the program is scalable, sustainable, and compliant with all the existing laws and regulations. 

Under such scrutiny, FlexWage’s Earned Wage Access is the compliant, low-risk, and sustainable solution.

Ready to learn more?

Keeping track of Federal and State regulations can be tedious and time-consuming.  At FlexWage, this is part of who we are and what we do.  Don’t rely on a provider’s marketing hype for answers to costly questions.

Want more information about Earned Wage Access Done Right? Then, schedule an introduction call today!