September 7, 2021 | Payroll Software | Posted by Vicki Lambert, CPP
What are Wage Garnishments?
Wage garnishments occur when an employer withholds the earnings of an individual for the payment of a debt as the result of a court order or other equitable procedure. The proper handling of garnishments is one of the most difficult and complex issues affecting the payroll department. Payroll professionals must be aware of all federal and state requirements before processing the order. In this blog we will concentrate on how to handle the different types of garnishments, except child support under federal laws (state requirements will be covered under a future blog). These include federal tax levies, federal agencies debts, state tax levies, creditor garnishments, federal student loans and voluntary wage assignments. Before discussing the specific requirements for each of the types of garnishments, we will first cover the basic procedures for processing garnishments through payroll. This includes helpful definitions and best practices.
Garnishments are categorized as an involuntary deduction. This type of deduction is one in which the required deductions are made by someone other than the employee, such as a judge, federal agency, or state entity. It is critical for payroll to remember that when a garnishment is served it is served to the employer NOT the employee. In other words, if the employer fails to deduct the garnishment amount from the employee’s paycheck, the employer must pay the amount themselves.
Garnishments should be handled in the following priority order:
- Child Support
- Federal tax levy
- Federal Agency Debt Collection
- State tax levy
- Local levy
- Administrative or student loan
This priority order is not cast in stone. For example: If a federal tax levy was issued before a child support order, under the internal revenue service (IRS), the tax levy has priority. In actual practice it is generally accepted by the IRS and Child Support Agencies that child support will be honored first. Payroll professionals should be prepared to submit correspondence with both the IRS and the Child Support Agency to inform both that the tax levy is in effect and that a child support order has been received. This will usually result in the IRS giving “permission” for the child support to be taken first. In addition, we must look to state laws (discussed in a future blog) to determine the processing order if the payroll department has both a creditor garnishment and a state tax levy in effect. The state decides if their own tax levy comes first.
There are several steps that payroll needs to complete before processing a garnishment in the payroll system. These steps include: (1) determining if it is your employee (2) determining whether the document itself is legal and finally (3) determining what laws need to be followed to comply with the garnishment.
- Is it your employee? You need to determine if the employee is currently working for you. Remember it is possible the person named in the garnishment could be an independent contractor.
- Is the document legal? You need to determine if the garnishment received is legal and you can process it. Items where you might question the legality include is it on the proper form, from the proper source, completed correctly, delivered properly, and permitted under both federal and state law.
- What laws to follow? Except for an IRS tax levy, wage garnishment laws may be strictly state related or have both federal and state limits or requirements. This is where the Consumer Credit Protection Act (CCPA), the federal garnishment law, comes into play. The CCPA sets the limits and determines what wages are subject to creditor garnishments although the state can have a lower permitted limit.
For most garnishments, you must do an answer back or a response to acknowledge receipt. The garnishment usually contains the form. The timeframe for the answer back depends on the type of garnishment and issuing entity. For example, an IRS tax levy requires that payroll send in the response form with the first payment. However, a creditor garnishment may require an immediate response or a response within 20 days. The employee must also be notified of the garnishment. The garnishment itself may include the employee notification, as with an IRS tax levy.
Once withheld, the funds must be distributed, the timing of which depends on the type of garnishment. For example, a creditor garnishment may require funds be distributed monthly or be held until the entire amount is collected.
Now that we have covered some of the basics of processing garnishments in the payroll department let's examine the regulations concerning each type of garnishment.
- Federal Tax Levies: served on a Form 668-W Notice of Levy on Wages Salary and Other Income. In calculating the amount of funds to withhold for the levy employers are to use IRS Publication 1494. This chart lists the amounts that are exempt from levy. Payroll deducts the amount for the levy from what is known as “take home pay”.
- Federal Agency Debt Collections: issued for failure to pay a non-tax debt such as overpayment on Social Security benefits, this garnishment is subject to the CCPA and the Debt Collection Improvement Act of 1996. Normally payroll can take up to 15% of disposable earnings or the amount that exceeds 30 times the federal minimum wage whichever is less. But if more than one garnishment is in effect you may go up to the 25% limitation of the CCPA.
- Creditor garnishments: issued for failure to pay a private debt. Normally issued through a court, this type of garnishment is subject to the CCPA limits. For creditor garnishments the CCPA limit is 25% of disposable or the amount that exceeds 30 times the federal minimum wage whichever is less. But creditor garnishments can be limited by state law as well (discussed in a future blog).
- State tax levies: CCPA limits do not apply to state tax levies So the state may have whatever they deem acceptable. It could be 25% of disposable or for example in North Carolina it is 10% of an employee's wages.
- Student loans: for the repayment of a student debt employers must follow CCPA limits and the Higher Education Act and follow the same limits as an Agency Debt discussed above.
- Voluntary wage assignments: these are not garnishments from a court order and are not subject to any federal garnishment laws such as the CCPA. However, the states have begun implementing laws concerning voluntary wage assignments which we will cover in a future blog.
With the many layers of creditor garnishments, it can be easy to second guess how you are processing these garnishments. To learn more about these fundamentals, check out our payroll webinar, “Tax Levies and Creditor Garnishments: What Payroll Must Know to Stay in Compliance”.
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Vicki M. Lambert, CPP, is President and Academic Director of The Payroll Advisor™, a firm specializing in payroll education and training. The company’s website www.thepayrolladvisor.com offers a payroll news service which keeps payroll professionals up-to-date on the latest rules and regulations. With 40 years of hands-on experience in all facets of payroll functions as well as over three decades as a trainer and author, Ms. Lambert has become the most sought-after and respected voice in the practice and management of payroll issues. She has conducted open market training seminars on payroll issues across the United States that have been attended by executives and professionals from some of the most prestigious firms in business today. A pioneer in electronic and online education, Ms. Lambert produces and presents payroll related audio seminars, webinars and webcasts for clients, APA chapters and business groups throughout the country. Ms. Lambert is also an adjunct faculty member at Brandman University in Southern California where she is the instructor for American Payroll Association’s “PayTrain” online program.