Payroll Solutions for Advance Pay: Taking the Friction Out of Pay Advances

Do your employees ever ask for pay advances?

As personally stressful and humiliating as it might be for someone to come in and ask you for a paycheck advance, it also creates a lot of work for you, right?

Maybe you’re the supervisor, and to give someone a payroll advance you have to fill out a form and get your manager’s signature. Or maybe you’re worried that if you do it for one employee, then word will get out, and others will ask for a paycheck advance too, and the paperwork will never end. Maybe you’re even a little miffed that your workers can’t manage their finances better.

Or perhaps you’re a small business owner simply trying to “do the right thing” for your workers, which includes helping them deal with occasional financial emergencies. But even if you use the simplest accounting software in the world, issuing a pay advance is still a cumbersome, non-routine procedure. 

Payactiv’s EWA payroll solutions for advance pay can help you take the friction out with allowing employees access to their earned wages.

What Is a Pay Advance?

A pay advance (or payroll advance) is a short-term, unsecured loan granted to employees by their employers. Essentially, it involves the employer agreeing to release payroll funds to the employee in advance of their regular payday. In most cases, these advances are designed to help the employee cover an unexpected or urgent expense that can’t be delayed till payday.

Employee Loan vs. Paycheck Advance

Paycheck advances (or payroll advances) can be used to meet any short-term financial need such as medical expenses or any other unexpected or emergency costs. The amount is deducted by the employer from the employee’s regular monthly or biweekly salary run.

An employee loan is an amount that a person borrows to meet a longer-term financial need, such as an investment in a car or home or even educational expenses. It’s essentially a debt that’s repaid over an agreed period.

When Is a Payroll Advance Required?

Payroll advances are often requested by employees who work from paycheck to paycheck or suddenly find themselves cash-strapped and needing to fund sudden expenses before their salary is credited.

What Are the Consequences of Granting Payroll Advances?

Payroll advances can make life easier and less stressful for employees who run into unexpected financial trouble. However, if employers fail to put clear guidelines and guardrails in place, it’s possible that some employees might start abusing the system.

The Challenges of Traditional Pay Advances

While payroll advances provide your employees with a quick fix by allowing them to access funds immediately, it’s vital that workers understand the possible drawbacks associated with them. There’s a myriad of potential pitfalls that might counterbalance the immediate relief that comes from a payroll advance.

One of the primary downsides of pay advances is that they increase the risk of employees falling into long-term debt. When workers take an advance on their wages, they receive less money in their next paycheck. This might cause some workers to apply for advances repeatedly, creating a continuous cycle of early payments followed by shortages. Additionally, workers’ dependency on these paycheck advances can impact their ability to build sound financial planning skills. Having immediate access to funds might hamper their ability (or motivation) to develop responsible saving habits.

Another issue is the fees associated with payroll advances. While not all organizations charge fees, some impose steep costs, which can add up over time. If employees don’t fully understand the terms and conditions associated with payroll advance programs, it can end up increasing their financial stress rather than alleviating it.

How to Prevent Payroll Advance Issues

As an employer, if you go down this route, you need to be diligent about establishing a payroll advance policy that all employees must follow without exception. These should be incorporated into your employee handbook and widely communicated.

What Is the Distinction Between Payroll Advances and Credit Card Cash Advances?

With a credit cash advance, a person borrows a certain amount of money against their credit card’s line of credit. Unlike payday advances, they’ll usually pay a fee for using this service.

Earned Wage Access – a Smarter Payroll Solution for Advances and Payday Loans

Payactiv’s Earned Wage Access (EWA) solution is the smart choice for employers and employees alike and a better option for everyone than payday loans and paycheck advances.

How Is it Different from Paycheck Advances?

It’s a service that allows employees access pay they’ve already earned but not yet collected before their regular payday. Think of it as instant, on-demand pay.

Our EWA service is low-cost to employees and zero-cost to employers. Our unique operating model means that our service doesn’t involve lending money to employees – we simply provide access to their earned cash early. There are no credit checks and no adverse impact on credit histories.

We offer a SaaS-based service so that employees can access the service anywhere, with a smartphone. We also offer rewards and access to better banking and financial management services. Our service integrates fully with the systems provided by the significant payroll providers to align fully with your payment process from the get-go.

Before and After Payactiv

So, let’s compare the processes required to provide an employee with a pay advance, both before and after making the Payactiv solution available at your company:

Before Payactiv

Here are the actual instructions provided by one popular accounting tool for small and medium enterprises, instructing you how to issue a payroll advance to an employee (I’m not making this stuff up):

Creating a (Non-paycheck) Check for a Payroll Advance

1. From the Desktop Banking menu, select Write Check.
2. Select the bank account from the Bank Account drop-down list.
3. Select the date for the check.
4. Select the employee from the Pay to the Order on the drop-down list and click OK on the warning screen. Note: The advance check is a regular check and will not affect payroll taxes.
5. Enter the dollar amount of the advance below the check date.
6. Select the account from the Expense tab Account drop-down list. (Note: The account for this should be the same as the account that will be used to pay back the advance so that the accounting portion of it is correct and is usually an asset account or other current asset account). Optional: Select the class from the Expense tab Class drop-down list if you want the check to affect a class.
7. Check the Print Later box next to the Print
8. Click Save & Close.

Printing the Payroll Advance Check

1. From the File menu, select Print Forms and click Checks. (Note: If the check does not appear in the Select Checks to Print window, make sure you have the correct bank account selected in the Bank Account drop-down list and that you checked the Print Later box next to the Print icon.)
2. Edit the First Check Number if necessary.
3. Make sure the check has a checkmark in the far-left column and click OK.
4. Make any necessary printer changes and click Print.

Setting up a Deduction Payroll Item to Pay Back the Payday Advance

1. From the Desktop menu at the top, click Lists > Payroll Item List.
2. Select the Payroll Item button and click New.
3. Select Custom Setup and click Next.
4. Select Deduction and click Next.
5. Enter the name of the payroll item that will be easily identifiable (such as Advance Payback) and click Next.
6. Leave the first two fields blank, and select the account which will be affected by this payroll item in the Liability account drop-down list. (Note: The account for this should be the same as the account that was used to give the advance so that the accounting portion of it is correct and is usually an asset account or other current asset account), and click Next.
7. Make sure None is selected in the Tax Tracking Type window (this payroll item will not affect taxes as it is being deducted from the net pay) and click Next.
8. Leave the taxes unchecked and click Next.
9. Select Neither in the Calculate based on quantity screen and click Next.
10. Select Net pay and click Next.
11. Click Finish.

Note: You should only enter a default rate and limit if the rate and limit will apply to everyone using the item. Otherwise, you should enter the rate and limit in the employee’s profile.

Creating a Paycheck with the Cash Advance Repayment

1. From the Employees menu, select Pay Employees.
2. Select the employee and click Open Paycheck Details.
3. In the Preview Paycheck, make sure you are paying the employee for the full pay period in which the cash advance was taken.
4. Go to the second column on the left, another payroll item. Click under the payroll item and use the drop-down arrow to select Cash Advance Repayment.
5. Enter the dollar amount from the cash advance in the Rate column. Your employee should either have a 0 check or it should be smaller than normal in the net amount (you can never issue an employee a negative check). You may need to adjust the employee’s FIT and or SIT. If you still have a negative check, you may have to take this out on another check(s).

After Payactiv

Here are the instructions for issuing instant, on-demand wage payments to an hourly employee after your company has made the Payactiv app available:

Carry On with Your Normal Workday

1. Don’t open your accounting program, and don’t access the payroll system.
2. Don’t write any checks, fill out any forms, or look up any account numbers.
3. Accept your employees’ gratitude for allowing them to deal with their financial emergencies on their own, like the adults they are.

Benefits of a Streamlined On-Demand Pay Solution from Payactiv

Payactiv provides a frictionless payroll advance process – so frictionless that you’ll no longer be required to play judge and jury in deciding whether a particular worker’s financial need merits an advance. You won’t even have to know when a worker gets a pay advance because any worker will be able to get an advance whenever they decide they need one, without having to give up their privacy or dignity.

Importantly, the Payactiv solution isn’t a payday loan or paycheck advance; it just gives workers a frictionless and timely way to access the money they’ve already earned. Workers can even use the app to put money aside in a savings program, automatically.

And you know what else is frictionless? Deciding to make the Payactiv app available, to begin with.

Payactiv costs your company nothing at all to install or use and has no effect whatsoever on your cash flow because we fund each transaction. It requires no integration with your accounting or payroll systems, violates no financial regulations or privacy rules, and is so easy to implement that you can make it available to employees literally within a few days of deciding to do so.

Payactiv is a real-time, frictionless solution for your employees’ between-paycheck financial needs.

Why wouldn’t you offer it to them?

How On-Demand Pay Improves Employee Financial Health

The best on-demand pay providers integrate handy financial literacy and education tools into their offerings to help your workers advance on their journey to long-term financial security.

A suite of complementary financial well-being resources can have a huge impact, helping employees better understand how to budget, save, and spend in an inflationary environment. Initiatives might include personal financial counseling, financial literacy workshops, and digital savings and budgeting tools.

The Takeaway

While granting your financially strapped employees a paycheck advance gives them access to immediate cash for their short-term financial needs, as we’ve explored, it may have dire long-term implications that outweigh the benefits.

Payactiv offers a viable and far more satisfactory alternative to paycheck advances for employees and employers alike.

Learn more about Payactiv’s Service, or book your demo now.

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