Yes, your company can loan you money, but whether it’s allowed and how it has to be structured depends on the type of employer and how carefully the paperwork is done. Private businesses have wide latitude to lend to employees, officers, and owners. Public companies are barred by federal law from making personal loans to directors and executive officers. In every case, the IRS will treat the transaction as a real loan only if it looks like one on paper: a signed promissory note, a stated interest rate at or above the Applicable Federal Rate, and a fixed repayment schedule that the borrower actually follows.
Whether Your Employer Is Allowed to Lend
If your employer is publicly traded or files reports with the Securities and Exchange Commission, Section 13(k) of the Securities Exchange Act, added by the Sarbanes-Oxley Act of 2002, makes it illegal for the company to extend a personal loan to a director or executive officer.1Office of the Law Revision Counsel. 15 U.S. Code 78m – Periodical and Other Reports The prohibition covers new loans, renewals, and indirect lending through subsidiaries. Rank-and-file employees at a public company are not covered by the ban, so a public employer can still run a loan program for non-executive staff.
Private businesses face no equivalent federal restriction. LLCs, S-corporations, partnerships, and closely held C-corporations decide who can borrow through their operating agreements, bylaws, or board resolutions. Approval usually comes from a vote of the board, the managing members, or the ownership group, and eligibility can extend to any full-time employee, officer, or owner-shareholder depending on the governing documents.
What the IRS Needs to See for It to Count as a Loan
The biggest risk in a company loan isn’t that it goes unpaid. It’s that the IRS looks at the arrangement and decides it was never a loan at all. If that happens, the entire principal gets reclassified as taxable compensation for an employee or a taxable distribution for a shareholder, and you owe ordinary income tax on it at rates ranging from 10% to 37%, plus potential interest and penalties.2Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
The IRS and tax courts weigh several factors together, and no single one decides the outcome. What they look for:
- A written, signed promissory note stating the principal, interest rate, repayment schedule, and maturity date.
- An interest rate at or above the Applicable Federal Rate for the month the loan is executed.
- A fixed repayment schedule the borrower actually follows. A pattern of missed payments with no enforcement suggests the money was really compensation.
- Collateral or security, especially for larger amounts. Not always required, but it strengthens the case.
- A realistic ability to repay based on the borrower’s income and credit standing. A loan the borrower could never plausibly pay back looks like disguised pay.
If several of these factors point the wrong way, the principal can be recharacterized as income in the year it was received.3Internal Revenue Service. Internal Revenue Manual 4.10.13 – Certain Technical Issues Keep the promissory note and every payment record in the company’s permanent files so they’re available in an audit.
The $10,000 Small-Loan Exception
If the total you owe your company on all outstanding loans stays at or below $10,000 on every day of the year, the IRS imputed-interest rules under Section 7872 don’t apply.4Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates A small interest-free loan won’t create extra taxable income for either side as long as you stay under the ceiling.
Two limits matter. The $10,000 threshold covers all loans between you and the company combined, not each loan separately. Borrow another $5,000 when you already owe $7,000 and you’ve crossed the line for the whole balance. And the exception is unavailable if one of the main purposes of the below-market interest is federal tax avoidance.4Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates
The Minimum Interest Rate You Have to Charge
For any company loan above $10,000, the IRS requires interest at or above the Applicable Federal Rate (AFR). The AFR is a set of minimum rates the IRS publishes each month, tied to U.S. Treasury yields. Which tier applies depends on the loan’s term:
- Short-term, three years or less: 3.56% for February 2026.
- Mid-term, over three years and up to nine years: 3.86% for February 2026.
- Long-term, over nine years: 4.70% for February 2026.
Those are the annual-compounding rates; semiannual, quarterly, and monthly compounding rates run slightly lower.5Internal Revenue Service. Revenue Ruling 2026-3 – Applicable Federal Rates You lock in the rate for the month the loan is signed, and it stays fixed for the life of the loan regardless of later market changes. Write the chosen rate into the note itself.
What Happens if You Pay Less
Charge less than the AFR, or nothing at all, and the IRS treats the gap as “forgone interest.” Under Section 7872, the company is treated as paying that phantom interest to you as additional compensation, and you are treated as paying it right back as interest.4Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates No cash changes hands, but both sides report the phantom amounts on their returns.
An example: you borrow $50,000 for five years at 0% interest when the mid-term AFR is 3.86%. First-year forgone interest is roughly $1,930. Your employer adds that to your W-2, raising your taxable wages, and reports the same $1,930 as interest income on its own return, even though nothing was actually collected.
Extra Risk if You Also Own the Company
If you own shares in the business lending you money, which is common in closely held corporations and S-corps, the IRS applies extra scrutiny. A below-market or thinly documented loan to a shareholder can be recharacterized as a constructive distribution instead of wages.6Internal Revenue Service. Publication 542 – Corporations In a C-corporation, that distribution is taxed as a dividend to the extent of earnings and profits. In an S-corporation, it reduces your stock basis and can trigger capital gains tax once it exceeds that basis.
Forgone interest on a below-market shareholder loan is treated as a distribution from the corporation to you, followed by a deemed payment of interest back to the corporation.6Internal Revenue Service. Publication 542 – Corporations Other patterns that turn a shareholder “loan” into a taxable distribution include canceling the balance, repeatedly extending maturity without payments, and lending amounts the shareholder could not realistically repay. When you’re both employee and shareholder, the IRS decides whether reclassified amounts are wages or dividends based on the substance of the arrangement.
How You Pay It Back
The usual repayment method is automatic payroll deduction, with an agreed portion of your after-tax pay withheld each pay period under a signed voluntary wage assignment.7U.S. Department of Labor. Fact Sheet #30 – Wage Garnishment Protections of the Consumer Credit Protection Act Because the deduction is voluntary rather than a court-ordered garnishment, the Consumer Credit Protection Act’s 25% cap on disposable earnings doesn’t directly apply. The deduction still can’t drop your effective hourly rate below the federal minimum wage of $7.25 per hour under the Fair Labor Standards Act.8U.S. Department of Labor. Handy Reference Guide to the Fair Labor Standards Act Many states impose tighter limits on payroll deductions for employer loans, so check your state’s wage-payment law before signing.
If payroll deduction isn’t practical, personal check or electronic transfer on a monthly or quarterly schedule works. Track every payment against the outstanding balance. Consistent, documented payments are among the strongest indicators the IRS uses to confirm a real loan.
Leaving the company complicates things. Most promissory notes include an acceleration clause requiring the remaining balance either immediately or within a short window, often 30 to 60 days. The employer may also try to deduct the balance from your final paycheck, but FLSA rules still forbid reducing pay below minimum wage for hours already worked.8U.S. Department of Labor. Handy Reference Guide to the Fair Labor Standards Act State laws vary widely on whether an employer can withhold from a final paycheck for an outstanding loan; some require written consent, others prohibit it entirely.
What Happens if the Company Forgives the Loan
If your employer wipes out part or all of the remaining balance, whether because you left and collection isn’t worth pursuing or as an intentional benefit, the forgiven amount becomes taxable income to you in the year of forgiveness.9Internal Revenue Service. Topic No. 431 – Canceled Debt, Is It Taxable or Not? You report it as ordinary income, and the company must issue Form 1099-C if the canceled amount is $600 or more.10Internal Revenue Service. Form 1099-C – Cancellation of Debt Limited exclusions exist, including insolvency at the time of forgiveness and cancellation in a Title 11 bankruptcy case, but they’re claimed on IRS Form 982 and don’t apply automatically.