Can we deduct from an employee's paycheck to pay back an advance?

The answer depends on several things, including how much the employee earns, how much the employee borrows, and what state you do business in.

Employers are not required to allow payroll advances (loans from the employer made against an employee's future earnings). Many employers simply don't let employees take advances. After all, it can be a hassle for your payroll administrator. It also puts your company in the position of providing banking services for employees, essentially.

If you choose to allow advances, however, you need to follow some basic rules when it comes to getting your money back. Under federal law, you may deduct an advance from your employee's paycheck. However, you may not deduct so much that it reduces your employee's pay to less than the hourly minimum wage ($7.25, currently). For low-wage employees, this means you may need to spread the repayment period out over several paychecks.

State law might set more protective rules for employees. For example, some states allow employers to deduct money from an employee's paycheck to repay an advance only if the employee agrees to the deduction, in writing. Even if your state doesn't imposed this requirement, however, it's a good idea to follow it. That way, you'll have written proof that your deduction was authorized. And, employees will be on notice of exactly how they'll have to pay back that advance.