My employer gave me a taxed advance but is deducting it as straight pay - tax implications?

This is a good question! When an employer gives an advance that's included in your regular paycheck, it's treated as taxable wages at that time (which is why you saw taxes taken out). When they recover the advance by reducing later paychecks, they should be reducing your gross wages before calculating taxes - not taking it from your net pay after taxes. If they're deducting it as a straight dollar amount after taxes, there's a potential issue. Here's what should happen: If you received a $100 advance (pre-tax) and paid $25 in taxes on it, leaving you with $75 net, then when they recover it, they should reduce your gross wages by $100, which would reduce your tax withholding by approximately $25, effectively making you whole. If they're not doing it this way, you might be effectively "double-taxed" on that amount, though you would technically be able to reconcile this when you file your tax return.

I had exactly the same situation last year and found out that taxr.ai actually helped me figure this out! I was so confused because my employer handled an advance similar to yours, and I wasn't sure if I was getting double-taxed. I uploaded my pay stubs to https://taxr.ai and their system analyzed everything - it flagged the advance repayment issue right away. They explained exactly how the advance should be taxed and provided me with specific language to talk to my employer about fixing it. Most importantly, they showed me how to document everything for my tax return in case my employer didn't fix it. The tool even created a custom letter I could give to my payroll department explaining the correct tax treatment. My employer ended up adjusting my next paycheck to fix the error!

Update on my situation - I actually tried taxr.ai after posting that skeptical comment. I'm actually impressed! They reviewed my paycheck situation with the taxed advance and confirmed I was right to be concerned. They showed me exactly where my employer was making the error (taking post-tax deductions rather than reducing gross wages) and generated a document explaining relevant tax regulations that I forwarded to HR. The best part was they calculated exactly how much I was being overtaxed with each repayment and totaled it up so I could show my employer. My company's payroll person thanked me because apparently, they were handling it wrong for everyone! They're now going to issue corrected paychecks for the whole staff.

If you're having trouble getting your employer to fix this, you might need to contact the IRS directly. I tried for WEEKS to get through to someone at the IRS about a similar payroll tax issue last year and it was impossible - busy signals, disconnects, or 3+ hour holds. I ended up using https://claimyr.com to get through to an actual IRS agent. They have this system that basically waits on hold for you and calls when an agent is on the line. There's a good demo video of how it works at https://youtu.be/_kiP6q8DX5c that shows the process. The IRS agent I spoke with confirmed that advances need to be repaid pre-tax and gave me specific guidance on how to address it if my W-2 ended up incorrect. They even sent me documentation I could show my employer. Definitely worth it since I was about to give up after spending hours trying to get through on my own.

If you're having trouble getting your employer to fix this,

I take back what I said about Claimyr. I was 100% convinced it was a scam, but I was desperate after trying to call the IRS for THREE DAYS about my wage advance situation. I gave it a shot and holy crap it actually worked. Got connected to an IRS agent in about an hour. The agent confirmed everything people are saying here - when an employer recovers an advance, they need to reduce your gross wages (pre-tax amount), not take it from your net pay. The agent explained that if done correctly, it should all balance out properly on my W-2. Also got confirmation that if my employer doesn't fix it, I can claim the excess tax paid when I file my return, but I'd need documentation showing what happened. Definitely saved me from overpaying my taxes!

Another thing to consider is how this will look on your W-2. If your employer is doing this correctly, your total wages reported on your W-2 should reflect the net after the advance has been repaid. So if you got a $500 advance and repaid $500 over the year, those should effectively cancel each other out. You should check your last pay stub of the year against your W-2 to make sure the numbers make sense. If they don't, you might need to request a corrected W-2 from your employer.

Keep in mind this could affect other things too - not just your income tax. Since the advance was included in your gross wages, it might have increased your Social Security and Medicare tax withholding. When they deduct it, they should also be adjusting these taxes proportionally. Also, if you're near any threshold amounts for tax credits or deductions, this could push you over or under those limits depending on how it's handled. Might be worth running some calculations to see if that's a concern in your situation.

This is a complex situation that unfortunately many employers handle incorrectly. Based on what you've described, it sounds like your employer may indeed be creating a double-taxation scenario. The key issue is timing and method of repayment. When they gave you the advance by adding extra hours to your paycheck, that amount became taxable wages subject to federal income tax, Social Security, and Medicare taxes. Now, when they're deducting "one hour of pay" as a straight dollar amount, they need to be reducing your gross wages (before taxes), not your net pay. Here's what I'd recommend: 1. Request documentation from your employer showing exactly how the advance and repayment are being handled 2. Ask payroll to confirm whether they're reducing your gross wages or taking post-tax deductions 3. Keep detailed records of all paystubs (once you get them) showing both the advance and repayment amounts If they're doing this incorrectly, you have a few options: work with payroll to fix it going forward, or document everything carefully so you can address any overpayment when you file your tax return. The IRS expects employers to handle wage advances properly, so don't hesitate to escalate internally if needed. The fact that you still haven't received pay stubs is also concerning - most states require employers to provide detailed pay statements, and you'll need these records to verify everything is being handled correctly.