A Payroll Advance vs On-demand Payroll: Which Should You Offer Your Employees?

Cody Cromwell
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Who is looking for an advance in their paycheck?

Customer Service Reps, Estheticians, Hygienists, Occupational Therapists, Retail Salespeople, Drivers, Truck Drivers, Janitors, Construction Workers, Managerial Personnel, and Associates.

Before you consider whether you should be offering your employees a Payroll Advance or On-Demand Payroll system, here are some things to keep in mind.

Who is most interested in this type of system for their payroll?

While an On-Demand Payroll system has the flexibility to suit every situation, Payroll Advances are best suited for situations where the employer has a one-time or fixed amount of funds available to pay out. i.e. there are already funds in the company budget and the employer only needs to increase the amount of payroll by a fixed amount.

For the most part, employers offering a Payroll Advance system to their employees are those who do not have the cash on hand to pay everyone what they are owed on a weekly or bi-weekly basis. For example, a small company with no revenue that would otherwise be able to pay their staff either bi-weekly or weekly but can only offer a one-time Payroll Advance that is paid in full when the employee goes through their clothing drawer.

Employers that do have access to an emergency cash fund but want to offer a payroll advance to all employees. i.e. traditional staffing agencies.

A Closer Look at On-demand Payroll

Vs. Payroll Advance

When you offer both an on-demand payroll service for on the spot payroll and a payroll advance service for weekly payroll, you’ll be giving your employees one of the above two payroll services.

Payroll advance is generally offered by payroll processing companies for businesses that usually meet payroll deadlines. On-demand payroll is also a payroll service offered by payroll companies and is mainly used by businesses that are more flexible in terms of payment deadlines.

I’m going to take an in-depth look at the differences between the two payroll services and also how you can best use them for your business, maximizing your payroll convenience and offering the services your employees need.

Payroll Advance

When you choose to offer payroll advance services, you’ll be providing your employees with a lump sum advance that they can use to pay for living expenses and other essentials, which they can return to you at a later date. A payroll advance feature is only available when you choose to use your payroll providers’ online payroll services.

The advantage of offering payroll advance services is that your employees can expect to receive on payday the money they need to pay for living expenses. It’s quite convenient for employees because they can plan for their expenses on time, and your business can also save on employee absences.

Managing and Funding On-demand Payroll

When setting up and managing an on-demand payroll system, you have access to many benefits that can make your employees happy and engaged. For instance, you can use pre-pay scheduling, pay approval, and direct deposit to make it easier on your employees.

Faster and More Accurate Pay

Your employees can complete their time cards more quickly, which helps you achieve payroll faster. When employees know that they’ll get paid soon, they’re more likely to spend more time working. With an on-demand payroll system, the accuracy of your payroll isn’t at risk and your employees don’t have to wait long for payment.

No Queue

There’s no need to wait in line anytime your company needs to make payroll. An on-demand payroll system is an easy and convenient option that keeps your employees happy and engaged.

Reduced Injury Risk

When employees have easy access to their funds, they’re more likely to stay home instead of working additional hours that they’re not being paid for.

A Better Output and Better Performance

In general, employees contribute more and work harder when they’re happy. With an on-demand payroll system, you’ll achieve a better output.

Laws Affecting On-demand Payroll

The main difference between a payroll advance and on-demand payroll is that the former is for larger companies with existing cash flow, whereas the latter is for small businesses with less established accounts. Since the advance is for cash that’s already available, a company can easily repay the funds at the end of the payroll period. On the other hand, the on-demand payroll service allows businesses to review the funds as needed. Some service-providers actually offer payroll advances, as well.

Although these services are ideal to offer to your employees, they require a lot of work to implement. Especially for the setup portion, payroll is quite a complicated process. It requires someone to strictly monitor the company’s finances, which is not easy to do for small businesses.

Laws Affecting on-Demand Payroll

Serving Employees: Only large businesses are required to serve their employees with both forms of payroll but may choose to do so.

Payroll Tax: The only difference between an advance and on-demand payroll is that the former is for larger companies with existing cash flow, whereas the latter is for small businesses with less established accounts. Thus, small businesses will not be required to pay payroll taxes on the advanced amount.

A Closer Look at Payroll Advances

Not all businesses are in the position to offer their employees a regular pay cycle. Even if they are, they might not be in the best position to offer payroll advances to their employees.

With that said, when given the opportunity to offer payroll advances to their employees, many business owners choose to do so because they believe they increase utilization of the employees’ hours, which in turn increases productivity and profitability.

How are Payroll Advances Different from Salary?

Some people suffering from apples to oranges confusion think that payroll advances are equal to salary increases. But they’re not. By definition, payroll advances are non-discretionary payments made to employees to cover a portion of their pay that falls due near the end of the month.

Salary is on the other hand an amount of money that an employee is paid for each pay cycle that is determined based on job requirements. Individuals with the same job requirements can be paid different amounts of salary even if their bills, lifestyle, or personal objectives are the same. Salaries are approximately based on the job’s key responsibilities and accountabilities.

As a result, salary is discretionary while payroll advances are wholly non-discretionary.

How do Payroll Advances and Salary Impacts One’s Budget?

Laws Affecting Payroll Advances

Laws and regulations governing advances … specifically, payroll advances … are subject to changes based on how technology and the economy shift. However, there are several laws that have stood the test of time and apply to everyone and many employers throughout the U.S.

For example, employers in California are not allowed to make it a practice to give advances. They may, however, state in your employee handbook that you can give advances for travel expenses or medical emergencies, but not for any other purpose.

Federal law prohibits employers from making advances with the intention of accepting payment later. Payroll advances … with the intention of later paying interest for the loan … also are prohibited.

Payroll advances are banned due to the potential for abuse and are illegal.

This issue has been an issue in the news. Payroll companies in the United States are offering advances at interest rates as high as 67 percent. The Bureau of Labor Statistics defines payday lenders as locations that offer payday loans.

Managing Payroll Advances

Employers today are faced with a growing number of sophisticated online payroll solutions available to them. These solutions help them streamline their payroll, reduce the administrative burden associated with payroll, and provide more accurate results. In fact, forward-thinking companies today are moving their payroll process online. Enabling their employees to manage their personal payrolls online, as well, are a key component of this modern way of doing payroll.

One of the preferred payroll services is On-Demand Payroll. This is increasingly found in the market among companies who are on the lookout for an effective payroll solution. Payroll information is collected from their employees through payroll tax statements. This payroll processing system allows employers to meet their HR compliance obligations while encouraging their employees to seek new job opportunities. This is because they are able to access their payroll information online anytime they want.

While it may be true that an employee bears the sole responsibility for managing his/her own payroll related issues, many employers prefer to take the process out of the employee’s hands. As a result, they prefer to manage all their payroll processes using On-Demand Payroll systems.

Payroll Advances Are Not the Same as Traditional Payday Loans

Many businesses offer their employees small, short-term loans and paychecks. Called payroll advances or payday loans, it’s basically a fee that gives you a loan on the post-tax amount and the advance is advanced to you at the time of the payday when the funds are available.

Payroll advances have become increasingly popular in the last few years with millennials and other young workers, who are more financially savvy than their older adult counterparts. These workers view payroll advances as a low-cost way to bridge a short-term cash crunch and have the flexibility to delay repayment of the advance at a later point. Market research is clear: Payroll advances are popular with millennials.

However, a payroll advance is not the same as an payday loan. Like payday loans, payroll advances can be expensive and very short term – usually a matter of weeks at most. Like payday loans, they have to be repaid in a fairly short period of time. And like payday loans, they are very expensive. The fees for making a payroll advance or payday loan are somewhere in the range of 20 to 200% and can be very high. You can read more about payday loans and fees here.

So before you make your decision, it’s important to understand the differences between a payroll advance and a payday loan.

Which Is Better, On-Demand Payroll or a Payroll Advance?

Bottom Line

Which of these two types of payroll? Which payroll advance offers better benefits for the business and thus the employees?

When it comes to handling payroll, you can do it yourself, hire a bookkeeper, or pay a third party to do it for you.

You can choose to do it yourself and save time and money.

You can choose to do it with a bookkeeper whose assistance you can trust to do it right and properly.

You can choose to outsource it to save money.

However, which payroll advance will be the most cost efficient for you to pay the employer and employee taxes?

Here’s a look at each of these two payroll systems:

  • On-Demand Payroll
  • Payroll Advance

When you use on-demand payroll you pay for the payroll service as often as you need it. You don’t make any payments upfront since there’s no need to set up a pay period with the employer.

When you need payroll services, you pay for each payroll service as it’s needed. This means that you typically have to make a down payment before you can get any payroll services.

An individual or company should decide which payroll system is more cost effective for their business.