ANSWER ID:9144

This support note explains how to cater for employees who are paid wages in advance, which is then withheld from a future pay.

Here's what's involved:

Create a payroll advances asset account

Create a wage category for payroll advances

Create a deduction category to process the repayment of the advance

Pay the advance

Process the repayment of the advance

Report on advances and repayments

What if I use Pay Liabilities?

Create a payroll advances asset account

1. Go to the Accounts command centre and click Account List.
2. Click the Asset tab then click New.
3. Select Bank in the Account Type drop-down menu.
4. Give the account a unique number that suits your account list.
5. Name the account Payroll Advances. See our example below.
    
6. Click OK.

Create a wage category for payroll advances

1. Go to the Payroll command centre and click Payroll Categories.
2. Click the Wages tab then click New.
3. Name the new wage category Advance in Pay (or similar).
4. Select Salary as the Type of Wages.
5. Select the Override Employee's Expense Account option and make the Payroll Advances asset account (as created above) the Override Account. See our example below. A warning will be displayed regarding the type of account selected - disregard this warning.
    
6. Click Exempt and select the PAYG Withholdings category, then click OK. This will ensure that the advance is made tax-free. The advance will eventually be repaid from net pay.
7. Click Employee and select the employee to whom this applies, then click OK.
8. Click OK to close the Wages Information window.

Create a deduction category to process the repayment of the advance

1. Go to the Payroll command centre and click Payroll Categories.
2. Click the Deductions tab then click New.
3. Name the new category Advance Repayment.
4. Set the Linked Payable Account to be the Payroll Advances asset account (as created earlier in this support note). A warning will be displayed regarding the type of account selected - disregard this warning.
5. Set the Calculation Basis to User-Entered Amount Per Pay Period.
6. Set the Limit to No Limit. See our example below.
    
7. Click Employee and select the employee to whom this applies, then click OK.
8. Click OK to close the Deduction Information window.

Pay the advance

Let's use the example of Alan Long who has requested an advance of $125 which will be deducted from his next pay.

When processing the paycheque for Alan Long, in the Pay Employee window enter $125 in the Amount column for Advance in Pay. The addition of the $125 advance will not affect the amount of PAYG Withholdings deducted as shown in the example below.

Process the repayment of the advance

Once in the Pay Employee window for Alan Long, enter negative $125 (-125.00) in the Amount column for Advance Repayment. The $125 will be deducted from after tax earnings.

Report on advances and repayments

To determine the status of wage advances and repayments:

• Run the Accounts List Detail report to see the balance of the Payroll Advances asset account (created earlier in this support note). If the balance of the account is negative, an advance is still outstanding (hasn't yet been paid back). If the balance is zero, no advanced payments are outstanding. If the balance is a positive value, too much has been paid back.
• Run the Payroll Activity Detail report for employees who have been paid wage advances. Compare the value of the Advanced in pay wage category (created earlier) with the value of the Advance Repayment deduction category (created earlier). This will show how much has been paid in advance, and how much has been paid back.

What if I use Pay Liabilities?

If this feature is used, notice that the Advance Repayment deduction is considered a liability and shows in the Pay Liabilities window awaiting payment. In order to remove it from this list, complete a normal pay liability transaction, but rather than paying from your regular bank account, you will pay from the Payroll Advances Asset account linked in both your Wage and Deduction payroll categories created above.