Payroll Brass Tax: Real-Time Pay, Real-Time Compliance

Announcer: Welcome to the Ogletree Deakins podcast, where we provide listeners with brief discussions about important workplace legal issues. Our podcasts are for informational purposes only and should not be construed as legal advice. You can subscribe through your favorite podcast service. Please consider rating this podcast so we can get your feedback and improve our programs. Please enjoy the podcast.

Mike Mahoney: Welcome to this month’s installment of Payroll Brass Tax, the podcast where we discuss hot topics and employment taxes. I’m your host, Mike Mahoney, a shareholder in Ogletree’s Morristown, New Jersey office and the Chair of the Employment Tax Group. Joining me is Stephen Kenney, an associate in Ogletree’s Dallas, Texas office.

Today’s episode breaks down the payroll and employment tax implications of on demand pay, often called Earned Wage Access or EWA, and how real-time payment options like the Federal Reserve’s FedNow service are accelerating adoption. The short answer is that EWA can be a powerful benefit and an operational differentiator, but it lives at the intersection of the IRS’s constructive receipt doctrine, state wage payment and consumer protection regimes, and federal wage and hour rules.

As of today, March 27, 2026, the Treasury’s 2025 Green Book again requests clarifying changes from Congress, but no federal statute has yet harmonized the timing and deposit rules.
In the meantime, employers remain on the hook for federal income tax withholding, FICA and timing, and careful wage and hour execution. Steven, welcome back to Payroll Brass Tax. EWA is everywhere in the market right now, and FedNow seems to have taken the breaks off traditional payroll timing. Start us at a 30,000-foot view. What is on demand pay and how do instant payment systems actually work?

Stephen Kenney: Hi, Mike. It’s great to be back, and thanks for setting the table here on this issue. So, on demand pay lets an employee pull down a portion of the wages they have already earned before their regularly scheduled payday. The product design varies, but the common thread is that the employee initiates a request through an application and funds land in minutes in a bank account or a prepaid card or a payroll card.

The Federal Reserve’s FedNow service is relevant to this transaction because it enables instant clearing and settlement between participating financial institutions. That means an employer’s bank can push funds to an employee’s bank account in near real time once an employer or its payroll software gives the go ahead. The Federal Reserve’s own materials highlight payroll, off-cycle disbursements, and earned wage access as priority use cases. And they describe practical flows where an approved timecard triggers a real-time payment. It’s an operational capability story as much as a benefit story. Speed, certainty, and integration between payroll providers, employer systems, and financial institutions.

Mike Mahoney: Thanks. So, the allure is pretty obvious, but I imagine payroll folks worry about federal income tax withholding in particular. How does withholding timing work when pay can be pulled mid-pay period?

Stephen Kenney: The core rule has not changed when it comes to income tax withholding. Wages are still going to be considered paid when actually or constructively received by the employee, and that is when withholding is required. The IRS’s constructive receipt doctrine says wages are paid when they are set apart or otherwise made available so the employee can draw on them at any time. The tension with this earned wage access is that if access is truly on demand, then the employee may be viewed as having control over the date of receipt, which points toward earlier withholding compared to a fixed payday.

The Treasury Department has flagged this in multiple green books, including for fiscal year 2025, warning that employees with on demand access may be in constant constructive receipt, meaning they could always access the funds so they’re always in constructive receipt. And that under current law, employers offering earned wage access should maintain a daily or miscellaneous payroll period with daily withholding and deposits. In practice though, most employers do not run daily deposits. Until legislation passes, payroll teams should treat each on demand disbursement as a wage payment event for federal income tax withholding, and ensure their systems can compute, withhold, and record these amounts contemporaneously.

Mike Mahoney: That also bleeds right into FICA taxation. Do those attach at the same point and what’s the real-world playbook for earned wage access?

Stephen Kenney: Yes. When we’re talking about FICA wages, we’re talking about the same rules generally. So, FICA wages are also generally subject to tax when paid, and the constructive receipt doctrine also applies here. So, each earned wage access pool is a wage payment for social security and Medicare purposes. That means that you would have to calculate and withhold the employee share of FICA on that payment, accrue the employer share as well, and include the payment in wage bases as of that date. Deposit timing follows the standard lookback and semi-weekly or monthly schedules. Plus, you have to factor in that $100,000 next day deposit rule.
So, if you have $100,000 or more that you need to deposit in taxes, it’s required that next day, next business day. Also applied to aggregate liabilities and mid-cycle payments can be accelerated. Operationally, employers should insure three things. First, that each on demand disbursement triggers wage tax and year-to-date wage-based updates in the payroll system.
Second, that deposit scheduling logic recognizes the additional liabilities and avoids an inadvertent failure to deposit exposure. And third, that quarter end forms 941 and year-end forms W-2 reconcile all mid-cycle wage events to the totals. Treating earned wage access as a true wage payment in the payroll engine avoids year-end cleanups, especially where social security wage base limits and additional Medicare tax thresholds come into play.

Mike Mahoney: You also mentioned Treasury’s 2025 Green Book. What exactly is being proposed and what would it do for administrators if it became law?

Stephen Kenney: So, in short, it would streamline the process. So, the 2025 Green Book repeats a multi-year proposal, which is aimed squarely at the EWA timing problem. Treasury would amend section 7701 to define on demand pay arrangements as those allowing employees to withdraw earned wages before regular pay dates.

Internal Revenue Code Section 3401(b) would be amended to treat earned wage access arrangements as having a weekly payroll period, even if the employees access the wages during the week. Also, in the Internal Revenue Code, sections 3102, 3111 and 3301 would be amended to clarify that earned wage access is not a loan for federal tax purposes, and Section 63.02 would be amended to authorize special payroll deposit rules tailored specifically to earned wage access.
The administrative upside is clarity, a uniform payroll period, explicit non-loan characterization, and deposit mechanics that match the product reality. The key caveat is timing.
These are proposals by Treasury to Congress, not enacted in law, so today’s compliance remains anchored in existing constructive receipt and deposit regulations.

Mike Mahoney: Just pivoting a little bit, our wage and hour fans are wondering how this intersects with the Fair Labor Standards Act. Does earned wage access change minimum wage or overtime calculations or create any other hidden traps for employers?

Stephen Kenney: Just like earned wage access has to fit into existing tax regulations and tax law, earned wage access also doesn’t rewrite the FLSA. Employees must still receive at least the federal or applicable state minimum wage for all hours worked in the work week and time and a half of the regular rate for overtime hours. The regular rate still includes non-discretionary compensation paid in the work week, and that analysis is independent of what cash is dispersed. The traps can show up in deductions and record keeping. If an employee is charged a fee or opt-in tip by an EWA provider and the employer facilitates repayment by wage deduction, the employer must ensure that deduction does not cut into the minimum wage or overtime compensation in violation of federal or stricter state rules.

Separately, if an EWA draw happens midweek, you still compute the regular rate for that work week using total remuneration and hours for the week. The fact that some cash left earlier does not change the underlying calculus. Last, timing and completeness of wage statements and pay records must reflect all wage payments, including those that happen as mid-cycle disbursements so that you can satisfy FLSA and the state record keeping requirements.

Mike Mahoney: Let’s talk state law for a minute here. I’ve seen headlines about Nevada and Missouri setting rules for earned wage access. What should employers know and does it change payroll tax responsibilities?

Stephen Kenney: These state law developments are principally aimed at the earned wage access providers, but employers also need to understand the framework behind these laws. So, Nevada’s Senate Bill 290 established the first state licensing regime covering both employer integrated and direct-to-consumer earned wage access models, effective July 1st, 2024. So, we created licensing, disclosures, complaint handling, reimbursement of certain overdraft fees caused by provider timing errors, and it instituted prohibitions on collection practices, credit underwriting, fee sharing with employers and reporting nonpayment.

Missouri also had a Senate Bill, Senate Bill 103, which requires providers to register with the division of finance in Missouri. It imposes disclosures and conduct standards and clarifies that properly registered EWA services are not loans or money transmission under state law. These regimes don’t move federal payroll tax obligations from the employer to the provider. Employers remain the withholding and depositing agents for federal and most state tax employment taxes on wage payments.

What does change is the vendor’s due diligence requirements and the contract drafting. You need providers to be licensed or registered where required by state law. And then also the state laws are instituting transparent fees, complaint disclosures, and settlement practices that fit the wage deduction rules and payday statutes of the states.

Mike Mahoney: That tees up the thorny question of who the withholding agent is when a third-party provider fronts the cash for the earned wage access. Is there any scenario where it’s the provider that bears the responsibility for the tax deposit?

Stephen Kenney: In short, no. The typical EWA model accounts for that and makes sure that it’s not the third-party that becomes the withholding agent. The provider is typically not the common law employer and does not become one merely because they’re advancing funds to employees. The employer is going to remain the withholding agent because it controls the employment relationship and ultimately accounts for the wages.

Providers are not going to be filing employment tax returns or making employment tax deposits under their own employer identification number. They’re going to be doing it under the client’s identification number, and that’s not going to change solely by virtue of an earned wage access service. The IRS also has made clear in other third-party contexts, if we think about certified professional employer organizations or section 3504 agents, that special status comes with specific statutory and regulatory frameworks. Earned wage access providers are not operating within these frameworks.

They’re still operating in that typical payroll provider type arrangement. That said though, contracts should allocate responsibilities precisely. The employer computes and withholds taxes on each mid-cycle wage event, and the provider supplies accurate event data and supports settlement, and any wage deductions to settle advances are structured to comply with state law and not to obscure gross to net tax calculations. It is also prudent to require providers to indemnify employers for consumer law compliance within their control and for data errors that comprise wage tax or deposit accuracy.

Mike Mahoney: Some employers have tried to frame earned wage access as a loan to the employees to avoid the tax deposit timing friction that we’re discussing here. Treasury is clearly pushed back on that. Where does that stand and how should that influence employer’s design choices if they want to offer on demand pay to employees?

Some employers have tried to frame earned wage access as a loan to avoid the tax deposit timing friction that we’ve been discussing. Treasury has clearly pushed back on that. Where does that stand now and how should that influence employer’s design choices if they want to offer on demand pay to employees?

Stephen Kenney: Yeah. Thanks, Mike, for bringing the loan consideration to the forefront. I’ve alluded to it a little bit, but it does warrant its own discussion. So Treasury’s repeated Green Book proposals have stated explicitly that earned wage access is not a loan for federal tax purposes, and that treating it as such to avoid constructive receipt concerns is not consistent with the law’s intent.

The practical takeaway is to engineer compliance, not to recharacterize wages. If a provider or a program is marketed as non-recourse with no recourse to the employee and no credit underwriting, that may be relevant for state consumer credit classification, but it still doesn’t shift federal employment tax timing. Instead, employers need to configure their payroll systems to treat each on demand event as a wage payment with withholding and FICA updates, and align the deposit monitoring to the aggregate liabilities those events create. You can also mitigate the operational burden by limiting the cadence and percentage of wages available mid-cycle, and then aligning cutoffs so that most activity batches into administratable windows.

Now, if we take a step back, think about the loan consideration versus the wage consideration, if it was to be characterized as a loan, then you could potentially say these are not wages that are being dispersed to the employee, but instead it’s a loan and advance of sorts that’s being forwarded to them, and then they’re going to have to pay that back so there’s no tax event.
What Treasury is saying in these repeated green book proposals is that that’s not what’s happening here. This is actually in advance of wages. It’s not some sort of loan arrangement, so we still have to consider that a taxable event. Employees are ultimately getting paid as they receive these on demand or earned wage access payments.

Mike Mahoney: Thanks for that clarification. One of the other things you mentioned was FedNow, and it sounds like while that’s making it easy technically, there may still be instant money movement errors that occur. What controls should payroll teams build before they push the real-time button?

Stephen Kenney: Real-time payments are going to amplify the importance of real-time controls. You’re going to need verified time or earnings inputs, event level tax calculations, and automated general ledger impacts that keep wage tax and base limits, wage-based limits synchronized. Settlement reconciliation is going to have to run continuously, so the amounts dispersed, withheld, and queued for deposit can tie out. And because FedNow payments are irrevocable once sent, pre-disbursement validation is key, including identity, account status, and gross to net math checks.

Employers should also coordinate with their banks on FedNow narratives and payment identifiers, so you can tie bank activity to payroll records and quickly during quarter-end audits. Finally, you can build exceptions handling into the flow. If an event fails a validation rule, it should route to a suspense queue and out to a manual side process that later breaks your Form 941 or W-2 reconciliation.

Now, if we think about why the controls need to be in place, we can think about it from a perspective of not every payment that is made is necessarily a payment that you want to be made.
For instance, if somebody asks for an expense reimbursement, they’re not actually authorized to reimburse a particular type of expense. If that’s built into an on-demand type situation where we’re pushing the button in real time to be able to process expense reimbursements, they could end up getting an erroneous reimbursement that they’re not entitled to because of the speed at which now payroll transactions are flowing.

Mike Mahoney: Let’s land this with the compliance checklist. What are your top recommendations for employers contemplating or already running an earned wage access program?

Stephen Kenney: First and foremost, you got to start with the governance. So, that goes with identifying the stakeholders. Those stakeholders are typically going to be payroll, tax, human resources, legal, treasury, and your information technology specialists. And then you’re going to have to map an end-to-end process that treats every on demand event as a wage payment for federal income tax withholding, FICA, record keeping, and deposits. It may require you to build or require from your provider a data interface that transmits event level gross tax net and year-to-date updates in real time and ensure your payroll system posts those updates immediately. You’re also going to need to calibrate your deposit monitoring logic to account for the mid-cycle liabilities so that you’re not going to trigger a next day deposit obligation unexpectedly.

Next, you should also revisit your wage deduction policy under each state’s law to confirm that you have written revocable authorization and that repayment never drives an employee’s pay below minimum wage or impairs overtime. And then contractually, you should engage only with providers that are licensed or registered where required, and that takes us back to what we were talking about in Nevada and Missouri. And the provider should also commit to disclosures and consumer protections aligned with the state laws.

You’re also going to want to operationalize your controls around FedNow or other instant providers. Pre-disbursement validations, as we just talked about, bank reconciliation tags, exception handling, and audit trails that tie to your Forms 941 and W-2, you’re going to need all of them.

And then finally, you need to educate your employees. There’s going to have to be some clear disclosures on what earned wage access is, what it costs, how taxes are handled, and how repayment interacts with net pay. So, that will reduce surprises and complaints because there’s almost always going to be at least one employee that gets that earned wage access early and then is wondering why their paycheck is reduced on that biweekly pay period, but through education, you’re going to be able to reduce those surprises and complaints, which in turn is also going to help with the compliance risk.

Mike Mahoney: Any final cautions or open questions practitioners should track over the next few quarters?

Stephen Kenney: Yeah. So, the biggest open question is going to be whether Congress will adopt treasury’s proposals to standardize payroll periods and the deposit rules for on demand pay. So, if that happens, administrators will have a clear uniform framework, but employers should build their systems today to be able to pivot quickly.

At the state level, other jurisdictions are considering Nevada and Missouri style legislation and California’s regulators have been active in related oversight. Vendor diligence is not a one and done exercise. It requires oversight just as it does for any vendor. And although consumer credit characterization is not the same issue as payroll tax timing, it affects provider practices that can in turn affect, impact your wage deduction and employee communications obligations. In short, you need to align your payroll engine with constructive receipt today. Choose compliant partners and monitor those partners and keep your governance nimble enough to absorb emerging law without breaking tax deposits or waging hour fundamentals.

Mike Mahoney: Thanks for that masterclass, Steven. The key takeaway for our audience, treat each on demand poll as a wage payment for withholding, FICA, deposits, and records. Choose licensed or registered providers where state law requires it and harden your real-time controls before you go live. Thanks again, Steven, and thanks to all of you for listening to Payroll Brass Tax. We’ll be back next month. In the meantime, feel free to reach out if there are any topics you would like to hear covered.

Announcer: Thank you for joining us on the Ogletree Deakins podcast. You can subscribe to our podcast on Apple Podcasts or through your favorite podcast service. Please consider rating and reviewing so that we may continue to provide the content that covers your needs. And remember, the information in this podcast is for informational purposes only and is not to be construed as legal advice.