There may be times when your employee asks for an advance on their pay, to cover an unforeseen expense. These advances should be treated as loans, with an agreement between the company and employee to repay the advance either in their following paycheck or spread out over a period of time. For further reading, see our blog article about creating an employee advance repayment agreement and the full definition of a Payroll Advance in our glossary.
How to pay employee advances in Patriot Software
If you haven’t yet paid an advance to an employee, there will be some one-time set-up steps you’ll need to do at the company level:
- Add a non-taxable “Advance” Money Code at the company level (one time task).
- Use this in a payroll to pay the advance to the employee
- Add a company-level “Advance Repayment” deduction (one time task).
- Add the “Advance Repayment” deduction to the employee’s record
Here are more details…
1. Add a company level non-taxable Money Code in order to pay the employee advance.
- Settings > Payroll Settings > Hours & Money Codes
- Click “Add New” under the Money Codes.
- For the Name, enter “Advance” or something similar to make clear this is an advance payment.
- You can mark this as a frequently used code, if you always want to see this on your payroll worksheet.
- The W-2 Box dropdown can remain blank.
- Uncheck the Taxable box. This advance payment will not be taxed, but the deduction repayments will be taxed.
- The W-2 Third Party Sick pay box can remain unchecked.
2. Pay the advance in a payroll to the employee.
Once you have added the “Advance” Money Code, you will use this to pay the advance when you run the payroll. Note: If you are paying the advance to the employee by itself without other earnings, be sure to skip any voluntary deductions that are scheduled to come out. This will ensure that the full amount of the payroll advance is paid to the employee.
- On Payroll Step 1, if “Advance” is not a frequently used code, click “Show all Hour & Money Codes” to show “Advance.”
- Enter the amount of the advance.
- Proceed with the rest of your payroll as needed.
3. Add a company-level “Advance Repayment” deduction.
In order for your employee to repay the advance to the company, you will need to set up a post-tax deduction, first at the company level, then at the employee level.
- Settings > Payroll Settings > Deductions & Contributions
- For the Type, select “Post-Tax.” This means the employee will have paid income taxes on the money used to repay the advance.
- For the Description, enter “Advance Repayment” or something similar.
- For the Method, choose “Fixed Dollar.”
- You can leave the amount blank at the company level, and will fill in the employee’s repayment amount at the employee level.
- Leave the W-2 Box blank.
- Leave the Limits blank at the company level. You can fill in any limits at the employee level.
4. Add this “Advance Repayment” deduction to the employee’s record.
- Payroll > Employees > Employee List > Select Employee name
- Click the “Deductions & Contributions” link on the employee’s record.
- Click “Add a New Deduction.”
- Select the “Advance Repayment” deduction from the dropdown list.
- Enter the Amount Per Pay. If the employee is repaying the entire amount at one time, enter the entire amount. If they spreading out the payments, enter amount per paycheck.
- If the employee is spreading out the payments, enter a lifetime limit for the entire amount of the advance. The lifetime limit will automatically stop this deduction once the limit has been reached.