Advances and Loans

In general, payments you make to your employees for services they'll perform or complete in the future are considered taxable wages for all payroll tax purposes.

Let's assume you employ Jim as a salesperson and pay him on a monthly commission basis. Each week you advance Jim $200 against his future commissions. If the advances exceed Jim's commissions for the month, you carry the excess as an account due from future commissions. However, Jim has no obligation to repay that account if he should quit while his account has an outstanding balance. Under these facts, the advances are taxable wages when paid.

Loans distinguished. Advances are not taxable wages if the employees are legally obligated to repay the advanced amounts. In our example, if you required Jim to sign a note or agreement that obligated him to repay the advanced amounts upon your demand or upon specified events (for example, his termination from employment), the advances would likely be considered nontaxable loans rather than taxable wages.

Advances for expenses. Advances you give employees to cover business expenses they're reasonably expected to incur while conducting business on your behalf are not taxable wages if the advances are for deductible expenses, and you require employees to report what they spend. This is the same rule that applies when you reimburse employees for expenses they've incurred. In other words, as long as the advances are made under an "accountable plan," they are not taxable wages.