Employee Advances

The proper recording of an employee advance is critical for two reasons: accurate payroll records and related payroll taxes; and an effective method for tracking amounts owed to the business.

The best method for recording the employee advance will depend on several factors:

• Is the advance being given at the same time as a paycheck or between pay cycles?
• Will the employee be writing a check back to the company to repay the loan or will it be withheld from the paycheck.
• If it will be withheld from the paycheck, will the amount be paid back all at once, or over time?

Alternative 1: The advance and subsequent repayment will be handled through the payroll feature in QuickBooks.

This is the approach recommended by Intuit. 

This is to create an Employee Loan (coded to an other current asset type “Employee Loans” account) addition on the payroll item list and then use this addition on the employee paycheck.  The amount is then withheld from a subsequent paycheck using an Employee Loan Repayment (coded to that same other current asset type account) deduction on the payroll item list and then use this deduction on the employee paycheck until the amount is withheld in total.

Trick: To make this process more automated, the Employee Loan Repayment item can be added to the Payroll Info tab for the employee with a limit based on the loan amount.  This eliminates the potential error of forgetting to withhold the loan amount and/or an amount in excess of the loan.

Tip: An advantage of this approach is that the loan and the repayment both appear on the paycheck stub so it is very easy to see that the amount advanced has been repaid.

Alternative 2: The advance and subsequent repayment are at times that do not coincide with the payroll cycle.

The easiest way to handle this scenario is to issue a check that will be coded to an other current asset type account (for example, Employee Advance).  Then when the employee issues a check to the business for the repayment, the deposit is coded to that same other current asset type account for a net balance of zero. 

Alternative 3: The advance does not coincide with the payroll cycle, but the repayment will be withheld from the employee paycheck.

To follow the example in Alternative 1, a paycheck could be generated for only the employee loan amount (i.e. no gross wages and therefore no payroll tax impact).  This would provide the easy double check as mentioned in the tip.

The other alternative would be a hybrid of the first two alternatives, issue the check and code the amount to the other current asset, then set up a payroll deduction for the employee with the amount to be withheld and the limit to automate the process of withholding the amount due back to the company.

More information on this topic

Other Payroll Related Issues