What’s Your Position on Constructive Receipt?

For those who are not in the payroll industry, “constructive receipt” may sound like a term of art used by tax accountants and payroll professionals. In short, constructive receipt on payday triggers liability for employers.  

Employers providing earnings to workers before payday need to be sure that the partner who is facilitating that access is not effectively advancing payday for them because, if this happens, employers must be on their toes to stay compliant.

So what is this concept of constructive receipt? 

For payroll purposes, when an employee’s pay is made available to the employee without “substantial limitation or restriction,” a constructive payment occurs, according to Stephanie Salavejus, a certified payroll professional, COO of Pensoft, and former advisor to the IRS. 

Speaking during the November 13th DailyPay podcast, The Source, Salavejus said that once the “wages can be drawn on and controlled by the employee,” there are “major implications in the reporting as well as the release of revenue to pay the tax liabilities.”  

There is diversity in the platforms that provide employees access to money before payday, so when examining options, employers should pay close attention to regulations, to ensure they “remain compliant in the collection of, say, child support and garnishments,” Salavejus said.

“Critical to a discussion of constructive receipt is determining what constitutes a wage payment,” said DailyPay CEO Jason Lee, who also joined the podcast. Providers of access to amounts before payday cut across a spectrum of approaches, Lee said.

Lee asked, “Is the company funding the wage payment? Is the company or employer involved in making that decision [to provide amounts before payday]?” If the employer is funding the payments, and the pay on payday is being netted out, it is “hard to not interpret that as a constructive receipt of wages,” Lee said. “It’s a split wage payment.”

Lee also spoke about another “sort of a hybrid model,” whereby the vendor funds the payment, but there is a deduction from pay on payday. On payday, the employer processes a deduction in the amount of the payment made prior to payday. 

Here the issue is whether the vendor has been designated as an agent of the employer, Lee noted. If so, these cases also can be considered split wage payments “across two parties,” the first payment remains attributable to the employer and so consequently “it should have been a constructive receipt.”

In contrast to these other approaches, DailyPay is a third party “that is actually funding all the payments,” Lee said. The issue of constructive receipt for the employer is avoided because the employer is “literally running payroll as they normally do; they do not change the amounts, ”Lee said. “The full net pay is remitted, and nothing changes,”  

The employer may not even know the employee transferred earnings before payday because the arrangement is between the employee and DailyPay.

Numerous groups have asked the IRS for more guidance on constructive receipt, but to date, the agency has not assigned the issue to their priority guidance list. Lee said it’s likely not a priority “because the rules are already defined.”