Why Zero Tax on Tips and No Fees Earned Wage Access Are Connected

Jason Lee, Chief of Chime Enterprise

Look no further than the presidential campaign trail to find evidence of broad consensus that hourly workers should be able to take home more of their hard-earned money. Apparently, our two Presidential candidates agree on at least one thing!

In a rare show of bipartisan agreement, both Vice President Harris and former President Trump support legislation to exempt workers' tips from taxes. Both candidates announced their plans in Nevada, which has the highest volume of hospitality workers — 60,000 to be exact. According to CNBC, there are roughly four million U.S workers in tipped job roles. Most service and hospitality workers rely on tips for a large percentage of their income, so enacting this legislation would allow them to keep more of their own money.

It remains to be seen how this will all play out, but service and hospitality workers, of course, love the idea!

But why stop at tips? What about the fees that reduce take-home pay even further?

Removing financial barriers to access hard-earned cash shouldn’t stop there. For modern employees, taxes are just one line item that eats into their take-home pay. Another hidden cost is the fees employees pay to access their wages before payday.

Like tipped employees who need more of their income to take home, there’s growing concern about the fees workers pay to access their earned income through employer-offered earned wage access (EWA).

Over the last decade, thousands of employers have decided to offer on-demand pay to their employees through one of the many third-party providers that provide the benefit. However, the benefit typically carries a fee for employees who choose to access their pay. That fee can range from a couple of dollars to a $8-12 “tip,” depending on the provider.

There is increasing agreement that employees shouldn't have to pay a fee to access their pay using an employer-offered EWA app. It’s only fair—after all, it’s their money!

According to the Associated Press, the typical on-demand pay user earns less than $50,000 a year. Some EWA programs charge high fees or encourage what they call “tips” for an employee to access their earned wages. Other on-demand pay providers charge users a monthly subscription fee, while many charge fees only when users want to access their funds instantly. the average It stands to reason that EWA industry regulation was needed sooner rather than later.

The CFPB-proposed interpretive rule for EWA

The Consumer Finance Protection Bureau (CFPB) ensures consumers are protected at all costs by creating legislation that safeguards them and their hard-earned money. With the steady increase in the number of workers who access their earned wages through employee-offered EWA and the number of providers that offer it—all using different models and fee structures for the service—it was inevitable that the CFPB would address regulation of the EWA industry.

On July 18, 2024, the CFPB proposed a landmark interpretive rule that could dramatically change the current landscape of employer-offered EWA and on-demand pay. The proposal classifies paycheck advances as loans, which carries significant implications for both employers and employees under the Truth in Lending Act.

This interpretive rule clearly demonstrates that the CFPB favors fee-free models for employer-offered EWA products, so new regulations could come sooner than anyone expects.

No-fee EWA

The CFPB’s proposed rule could transform how providers deliver on-demand pay, addressing the pressing concern over fees that employees simply shouldn't have to bear. The CFPB clearly seems to favor no-fee EWA, which could reshape the industry.

Earned wage access has reached maturity, and with so many providers offering markedly different solutions for employer-offered EWA, it’s a no-brainer that regulators want to step in now. Rapid industry growth and workers who have come to rely on this benefit to bridge pay cycles demonstrate that EWA isn’t about to go away.

Our Presidential candidates favor zero tax on service and hospitality worker tips, and the CFPB favors zero fees for on-demand pay. If we truly want to honor the hard work of hourly employees, we must support both initiatives. Let’s work to ensure they have full access to their earnings, without unfair reductions in every penny they’ve earned.

For employers that currently have EWA programs and are looking at the possibility of moving to a no-fee EWA model, we’ve created a helpful chart to help you get started.

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