Payroll advances are a cash advance that employees receive from their employers earlier than normal. Typically, the advanced funds come out of the employee’s next paycheck, almost like a short-term loan repaid the next pay period. The employer either includes the advance in an earlier paycheck or gives it to the employee separate from regular payroll.
Employees may want a payroll advance for numerous reasons—maybe their car broke down and they need to pay the unexpected bill, or they want to book a family vacation without racking up credit card debt or getting involved with a bank lender. Regardless of the reason, advanced payroll demonstrates you support your employee’s financial well-being and can reduce turnover.
One of the greatest challenges employers face with payroll advances is not having an adequate system to regulate and track the flow of funds. This article gives you a step-by-step guide to seamlessly implement payroll advance to help provide an employee’s pay when they need it most.
Create a payroll advance policy
Before you begin offering your employees payroll advance, outline the terms and procedures. If you use a third-party payroll processor, they may already have policies and processes for a payroll advance, so you may want to start by reaching out to them. But if you’re a small business owner who manages payroll on your own (or with a small human resources team), you’ll want to create a policy that includes:
- Eligibility requirements
- Request process
- Terms of the advance
- How often employees can request an advance
Determine eligibility requirements
Begin your policy by stating which employees are eligible to ask for a payroll advance, and when. Typically, employers limit payroll advance to those who:
- Have completed their probation period
- Have not taken any other company-sponsored loan
- Are in good standing with the company (not in danger of termination, suspension, etc.)
In some cases, employers require their employees to provide a “legitimate reason” for requesting payroll advance. Some employers limit legitimate circumstances to unavoidable or unexpected occurrences like personal or family emergencies, hospital bills, or car repairs.
If you want to limit payroll advances to certain circumstances, you’ll need to specify what qualifies. You may want to provide examples of non-legitimate expenses: planned vacations, entertainment costs, gambling, or small fines.
You may want to give your employees the freedom to use an advance for any reason, no questions asked. In this case, clarify in your policy that employees can request a payroll advance up to a certain amount whenever they need.
Outline a payroll advance request processes
Your policy should also communicate how employees should request a payroll advance. Be as specific as possible–include links and screenshots to avoid confusion.
Depending on the size of your business, you may be able to rely on email to request advances. If you choose to use this kind of manual process, let employees know ahead of time what information to include (such as the amount requested and the reason for the request). And if you use an automated payroll software, your employees might be able to click a button to request an advance.
At the same time, you’ll want to give your employees a quick rundown of what will happen after they submit their request. Let them know where their request goes (and who sees it, so they don’t accidentally reveal unwanted information about the reason for the request) and when they can expect a response.
Describe terms of the advance
In your policy, include terms such as the amount of money an employee can request from their upcoming paycheck. Also, clarify where the funds will end up, whether in a separate paper check, in their bank account via direct deposit, or even applied to a bill directly.
Clarify whether you will take a lump sum from the next paycheck for repayment or the amount will be repaid in multiple installments via payroll deduction over the next few paychecks.
Decide how often employees can request an advance
Be extremely clear with employees about the frequency with which payroll advances are available, whether it’s only once a year or available for each paycheck. Documenting this in your policy (and following said policy) will spare you from too many requests or accusations of favoritism.
Access your money, when you need it
If you’re paid through Deel, you can receive your salary up to 30 days early, without insane interest rates, confusing T&C’s, or late repayment fees.
Deliver the approved advance and put it in writing
The next step is to provide the employee the advance. As we mentioned earlier, companies offer advances in many ways: in a separate check, via direct deposit, or in an earlier paycheck.
You’ll want to keep thorough records of all of the advances employees request for accounting and to settle any disputes should they arise.
Most companies create some sort of payroll advance agreement both parties sign and include a line item in any impacted pay stubs. If you have payroll software that already has payroll advance built-in, they’ll likely take care of your documentation.
Account for the advance in your books
If you give out payroll advances, you’ll have to include the advance in your bookkeeping to stay on top of your finances. If you forget to include the advance, you’ll have unexpected discrepencies on your balance sheet.
Accounting for payroll advances best falls under the umbrella of accrued payroll. Accrued payroll is an accounting method that tracks the accumulated money (including pending amounts).
Rather than tracking expenses when they go through, accrued payroll shows the full scope of money flow for each pay period by recording pending expenses such as invoices, paychecks that haven’t been cashed yet, pending credit charges for expense accounts, and—you guessed it—payroll advances.
Accrued payroll is the best way to track advances because it simplifies wage-related expense reporting and prevents accounting errors. You’ll use payroll journal entries to document approved cash advances and subsequent paycheck totals.
Payroll advances vs. payday loans
People often use the terms “payroll advances” and “employee loans” interchangeably, but they’re very different.
A payroll advance, also called a payday advance, offers employees money they would already get in a future paycheck. Advances are a non-mandatory employee benefit provided by the employer and usually involve no extra fees or interest.
A payday loan provides people with a small, short-term loan at a high interest rate. Usually, third-party lenders offer these personal loans at very steep interest rates. Borrowers must repay most payday loans within 14-30 business days or pay additional fines on top of the interest. Payday loans require good credit and can negatively affect borrowers' credit scores.
Can you give an independent contractor a paycheck advance?
Technically no, since independent contractors use invoices and aren't technically on employee payroll. Contractors receive payment via invoices, not employee payroll. That said, you can give a contractor a bonus or renegotiate the independent contractor agreement to provide higher payment if you love their work.
Make employee and contractor payments easier with Deel
If you have international workers, you probably already know how complex global payroll is. But making global payments shouldn’t stop you from having a global team. With Deel, you can fund payroll with just a click and automatically calculate payroll taxes without lifting a finger. Our multiple currency options and various withdrawal methods make it even easier for your team to get paid on time, every time.
One benefit of Deel is that you can pay employees and independent contractors from one platform. Deel Advance also gives independent contractors a flexible payments experience, and they can even withdraw funds in cryptocurrency.
Sound like something your business could use? Book a demo to see Deel in action.
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