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Level 1

Payroll advance payments are not supposed to be taxable, but QBO Payroll incorrectly withholds taxes on advance payments.

We pay employees sales commissions, commission draws, and sometimes commission advances.  The advances are set up in QBO as a separate 'additional pay' type.  The advance repayments are set up in Preferences as 'Cash Advance Repayment.'  Advances are loans that should not be taxed as pay, but two successive paychecks to one employee (one with a $5000 commission and the next with a $5000 advance) had the exact same net pay after taxes were withheld.  It appears that QBO is incorrectly withholding taxes on payroll advance loans.

Solved
Best answer 10-15-2018

Accepted Solutions
Level 2

QBO payroll is working correctly.  Sorry but payroll adva...

QBO payroll is working correctly.  Sorry but payroll advances ARE TAXABLE when paid not when earned.  See Starke v. Commissioner, TC Summary Opinion 2015‑40.   Payroll advances to an employee would very likely be considered compensatory (not a loan), see IRS Technical Advice Memorandum (TAM) xxxxxxxxx and related tax attorney analysis here https://www.alvarezandmarsal.com/insights/warning-employee-loans-could-have-adverse-tax-consequences

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18 Comments
Level 2

QBO payroll is working correctly.  Sorry but payroll adva...

QBO payroll is working correctly.  Sorry but payroll advances ARE TAXABLE when paid not when earned.  See Starke v. Commissioner, TC Summary Opinion 2015‑40.   Payroll advances to an employee would very likely be considered compensatory (not a loan), see IRS Technical Advice Memorandum (TAM) xxxxxxxxx and related tax attorney analysis here https://www.alvarezandmarsal.com/insights/warning-employee-loans-could-have-adverse-tax-consequences

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Level 2

Darn Intuit for hiding the TAM #, it is TAM 2 0 0 0 4 0 0...

Darn Intuit for hiding the TAM #, it is TAM 2 0 0 0 4 0 0 0 4
Not applicable

That's fine, but when the advance is repaid, QB deducts t...

That's fine, but when the advance is repaid, QB deducts the gross.  So the person pays taxes when the advance is given, and then pays taxes on the gross amount again the next week AND has to pay the gross amount back.  If they are going to do it this way, the repayment needs to be the net, since the person has already been taxed on the amount of the advance.
Not applicable

Or they could subtract it from the gross.  But they don't...

Or they could subtract it from the gross.  But they don't do either of those things, so the employee ends up paying taxes on the advanced amount twice.
Level 1

Agreed that it should not be taxed twice.  I am not curre...

Agreed that it should not be taxed twice.  I am not currently using QBO payroll, but think it is possible to do the repayment without double taxation.  So if regular pay is $1,000 and $500 less taxes was advanced, run a special payroll for the repayment with only $500 gross pay.  The employee has received $1,000 gross total on which taxes were fully withheld, which seems correct to me.
Not applicable

When running a payroll on which an advance is withheld, u...

When running a payroll on which an advance is withheld, usually one runs the total payroll and then withholds the amount of the advance.  Unless you are a payroll specialist (most QBO online payroll users are not), you will not realize that you can't just take back the $100.00 advance; instead, you need to figure out how much the employee received after taxes are withheld & enter that amount.  It's not very clear or easy to do.  Much easier to do a loan outside of payroll, and then do a repayment of the entire amount.  Or run the advance as something other than an "earnings type".  Just one of the many ways the QB online is more confusing and difficult to use than the desktop version :(.
Level 2

I wish Intuit hired more actual accountants and bookkeepe...

I wish Intuit hired more actual accountants and bookkeepers and payroll specialists, and not just IT folks who sometimes don't have a clue how the software should be used.  While it may be much easier to do loans outside of payroll, the IRS wants payroll tax promptly (as soon as 24 hours for large amounts) and as a responsible party you are personally liable for payroll tax delays, even if you are an outside bookkeeper, corporate officer or board member.  You are guilty unless proven innocent, they can take your house 10 years later, and it is a high enforcement area.  Delay or mess with payroll taxes at your extreme peril!  Errors in timely remiting payroll tax can kill the sale of an otherwise great business or ruin a career.  Beware.
Not applicable

Can you set up the advance item as a negative deduction?...

Can you set up the advance item as a negative deduction? That is what I do on the desktop version. It should look exactly like the advance repayment.

Or, you should be able to go into the payroll item and change the taxes being withheld on it. I cannot duplicate the steps without moving my desktop payroll to online.

Level 1

The repayment is not the problem.  QBO creates a P&L acco...

The repayment is not the problem.  QBO creates a P&L account named Repayment:Advance Repayment, and the repayments are going there.  There are two problems: 1) the loans to the employee are not being recognized in the same account as the repayments, and 2) the advance is a loan and should not be taxed.
Highlighted
Not applicable

I know the repayment is not the problem. I am suggesting...

I know the repayment is not the problem. I am suggesting getting the initial advance to mirror the repayment. It is a loan to the employee which should debit Employee Advances. Then, the repayment of that loan should be to credit the same account. I think the initial advance is set up incorrectly.

I cannot duplicate the steps for you because QBO wants me to move my company payroll to them before I set up the items.

Another option is to give the employee advances in a check outside of the payroll system. Post it to the proper asset account. Then, take the repayment as a payroll deduction like you already are.
Level 1

After reviewing the instructions more closely, I have det...

After reviewing the instructions more closely, I have determined that QBO is not capable of paying advances on paychecks as non-taxable items.  <a rel="nofollow" target="_blank" href="http://payroll.intuit.com/support/kb/1000672.html">http://payroll.intuit.com/support/kb/1000672.html... says to pay advances out as a non-payroll checks.  That is a clumsy and silly requirement.  The unspoken reason is so the loan won't be taxed.  Apparently all pay types on paychecks are subject to withholding.  This is extremely likely to be misunderstood since QBO is designed to collect advance repayments on paychecks, but not pay advances out through payroll.
Level 2

Re: After reviewing the instructions more closely, I have det...

I have been doing payroll advances for many years for employees who occasionally need funds in between paychecks. 

  • When the advance is made, it is an "addition to net pay" and is mapped to a balance sheet account (other current asset) for employee advances as a receivable.  No taxes are taken out at this time.
  • The employee signs an authorization to deduct the advance from the next paycheck.
  • On the next payday, the advance is deducted from net pay and is mapped to the same balance sheet account.  Taxes are calculated on the gross pay.

There is no need to calculate taxes on payroll advances.

Level 1

Re: QBO payroll is working correctly. Sorry but payroll adva...

It was not an advance it was an overpayment on a garnishment that he owes to the company.

 

Level 1

overpayment of a garnishment needs to be repaid but not taxed again

I overpaid an employee's garnishment and he has quit.  How do I add as income

but taxes have previously been paod.

 

Level 1

Re: QBO payroll is working correctly. Sorry but payroll adva...

terminated emplouyee owes the company money.  can this amount be added to his w-2?

Anonymous
Not applicable

Re: QBO payroll is working correctly. Sorry but payroll adva...

Hello, juliadaleytower.

 

I want to make sure this gets taken care of for you. I just need some more details about the issue.

 

How did you record the employee’s garnishment in QuickBooks? Also, can you give further explanation about this question “How do I add as income but taxes have previously been paod.”

 

Once I have the details, I'll be glad to look into it for you.

Level 3

Re: After reviewing the instructions more closely, I have det...

When doing the deduction/repayment of the advance, in this case, $150.00 bi-weekly, it is set to return to the same Asset account that it was linked to when giving the advance.  Which is set as:

Other Current Assets>Employee Cash Advances (I have not selected a parent account for this) and it will not allow this to work it gives me a message that says: Either the EMPLOYEE CASH ADV./CHARGES account, or its parent account, is an inappropriate account type. Please check the account types in your company's Chart of Accounts.  I would like the advance which is paid through payroll and the deduction to pay back the advance to go into the same Account within the chart of accounts so that you can see the flow of funds loaned/repaid go in and and out.  Is this possible to do with the Employee Cash advances being an Asset account?

QuickBooks Team

Re: After reviewing the instructions more closely, I have det...

I appreciate the complete details about your concern, @cfoster73.

 

When recording a cash advance repayment, it will be recorded on the same account that you associate with your Cash Advance payroll item. Let’s review the account associated with your Cash Advance payroll item.

  1. Go to the Gear Item.
  2. Choose Payroll Settings.
  3. Select the Preferences tab.
  4. Pick Accounting Preferences.
  5. In the Wage Expense Accounts section, look for the Cash Advance payroll item.

The cash advance repayment will also be applied to the same wage expense account that you use. You can refer to these articles for more insights about recording voluntary deductions in QuickBooks:

Alternatively, you can create a journal entry if you want the cash advance repayment to be applied to your payroll liabilities. For the step-by-step instructions, you can check this article: Manually enter payroll paychecks in QuickBooks Online.

 

Meanwhile, I’d recommend consulting with your accountant or a tax adviser so you’ll be guided accurately in setting up a cash advance repayment deduction.

 

Let me know if you have other questions. I’m always here to help. 

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