You employ Karinna as a salesperson and pay her on a monthly commission basis. Each week you advance Karinna $150 against her future commissions. If the advances exceed Karinna's commissions for the month, you carry the excess as an account due from future commissions.
However, Karinna has no obligation to repay that account if she quits while her account has an outstanding balance. Therefore, the advances are considered taxable wages when paid.
Advances are not taxable compensation if the employees are legally obligated to repay the advanced amounts. In our example, if you required Karinna to sign a note or agreement that obligated her to repay the advanced amounts upon your demand or upon specified events (for example, his termination from employment), the advances would likely be considered nontaxable loans rather than taxable wages.