Payroll Advance: What It Is, How It Works, and Why Earned Wage Access Is Changing the Game

Financial stress is a growing reality for the modern workforce. When unexpected expenses hit between paychecks, employees often turn to their employers, asking for a payroll advance, or as many call it, a “paycheck advance.” While employers want to help, fulfilling these requests through traditional means can create significant operational, legal, and compliance challenges.

The good news is there’s a better, scalable way to offer early access to pay, if you structure it correctly.

What is Payroll Advance? 

A payroll advance is when an employer gives an employee a portion of their expected future wages before their next payday. It’s often positioned as a goodwill gesture to help employees bridge a financial gap before their next check arrives.

But under current labor and lending laws, that “favor” is considered a loan, and it carries real risk for your payroll team. Advances on unearned wages are subject to consumer credit laws, wage deduction regulations, and potential tax reporting obligations.

How a traditional payroll advance works

In a typical setup:

• An employee requests an advance.

• The employer reviews, approves, and disburses funds, often from company reserves.

• Payroll deducts the advance from a future paycheck.

• A formal or informal agreement may outline repayment.

This may feel manageable on a case-by-case basis. But multiply that by dozens — or hundreds — of employees, and it becomes unsustainable. Even worse, many employers don’t realize that payroll advances are treated as credit under state and federal law. That means:

• You must document the advance like a loan.

• You must comply with lending laws and wage deduction rules.

You may be liable if deductions reduce an employee’s pay below minimum wage or violate repayment limits.

Why payroll advances are a lot of work for payroll

Employees may casually refer to this as a paycheck advance, but what seems simple to them creates a cascade of work for payroll and HR teams. Here’s why:

1. Manual processes. Each request requires review, approval, disbursement, and tracking, outside of standard payroll workflows.

2. Custom payroll entries.  Adjusting wages, inserting deductions, and reconciling repayment is time-intensive and error-prone.

3. Wage compliance risk. Improper deductions could violate wage laws in states like California, New York, and Illinois.

4. Tax complexity. Payroll must determine whether the advance is taxable and how to report it.

5. Recovery risk. If the employee leaves before repayment, you may not recover the funds at all.

6. Increased support tickets. Employees often question reduced paychecks, adding to the burden on payroll help desks.

Bottom line: Traditional payroll advances are high-effort, high-risk, and not built to scale.

Payroll advance vs. Earned Wage Access (EWA)

Modern employers are shifting toward Earned Wage Access (EWA), a tech-enabled alternative that gives employees early access to the wages they’ve already earned, not future wages.

Here’s how they compare:

Both payroll advances and EWA are now subject to increasing scrutiny. As of 2025, regulators in states like CA, NY, MD, and CT, as well as the CFPB, treat EWA as a loan. 

How to offer employees a payroll advance — the compliant way

If you're trying to figure out how to offer employees a payroll advance, the answer isn’t to manage it manually through payroll. The goal is to shift toward a compliant EWA solution that gives employees flexibility, without putting your team at risk.

How Chime Workplace™ helps you offer compliant payroll advance alternatives

Chime Workplace’s MyPay at Work™ Earned Wage Access¹ solution is a fully licensed earned wage access program that uses a settlement-based model, which means:

• No payroll deductions

• No wage assignments

• No custody of employer funds

• No fees to employees or employers

Offering early access to pay doesn’t have to come with risk. Chime Workplace gives you a safe, scalable, and employee-loved way to do it compliantly.

Want to learn more about MyPay at Work? Register for a demo today!