Payroll processing is a very detailed, sometimes complex process involving many different calculations to determine an employee’s earnings and taxes. Adding to the complexity are deductions for various employee benefits, as well as involuntary payroll deductions.
Unlike employee benefit deductions, involuntary deductions are required to be withheld by law and neither the employee nor the employer has any control over them. Involuntary deductions come in many different forms, with the most common including:
- child support orders
- wage assignments
- tax levies
- bankruptcy orders
- creditor garnishments
- student loan collections
- federal debt collection
The employer’s legal obligation to withhold also includes an obligation to remit the funds to the person or agency issuing the order. Failure to withhold and remit these deductions will result in penalty and interest charges to the employer.
How are garnishments calculated?
Each individual order will detail the amount to be withheld and the frequency to remit the funds. The order may call for a flat dollar amount to be withheld, or the garnishment may need to be calculated based on gross or disposable pay. There are usually maximum amounts that can be withheld from an employee’s pay (determined by the Consumer Credit Protection Act (CCPA)).
The calculations get even more complex when an individual has more than one order against them. Figuring out the priority to take the deductions and the maximum amounts to be taken can be frustrating. For most cases, the priority is as follows:
- Child support (only if in place before a tax levy is received)
- Tax Levy
- Creditor Garnishment
- Wage Assignment
- Student Loan – no guidance on priority, except that child support orders have priority
- Federal Debt Collection
While the following info is not all-inclusive, as each situation/garnishment can be unique, here is an overview of the process for handling each type of garnishment, and where applicable, the maximum amount that should be withheld:
- Maximum that can be withheld, per CCPA:
- 50% of the employee’s disposable earnings if the employee is supporting another spouse and/or children
- 60% if the employee is not supporting another spouse and/or children
- These amounts increase to 55% and 65%, respectively, if the employee is at least 12 weeks late (or in the arrears)
- For most states, including Wisconsin, disposable earnings are calculated by subtracting taxes from gross income. (If you are a government employer, also subtract Wisconsin Retirement System (WRS) contributions.) However, some states subtract health insurance premiums along with taxes from gross income to arrive at disposable earnings.
- The maximum amount and disposable earnings calculation follows the law of the state the employee works in.
- If a garnishment is in place (other than child support) when a bankruptcy order is received, the garnishment is usually stopped
- 401(k) (or other retirement plan) loans are exempt and can’t be discharged by the bankruptcy court
- Can take the employee’s entire net pay
IRS Tax Levy
- You will receive the five-part Form 668-W
- Part 1 is your copy to keep as the employer
- Provide Parts 2-5 to the employee. The employee should complete and return Parts 3 and 4 to you within three days.
- Use Part 4 to determine the employee’s take home pay
- Continue withholding until a release (Form 668-D) is received from the IRS. Interest will continue to accrue until the levy is paid in full.
- Form 2159 (Payroll Deduction Agreement) is a voluntary deduction agreement that will prevent a levy. An employer has to agree to honor this agreement.
State Tax Levy
- Each state is different, but in most states you are allowed to take the employee’s entire net pay
- Deductions are not limited to CCPA limits
- Although they are often confused, credit garnishments are not the same as wage assignments.
- The maximum amount that may be withheld varies by state.
- In Wisconsin, only one creditor garnishment can be honored at a time
- In Wisconsin, creditor garnishments are in effect for 13 weeks, except for government employers, who continue the deduction until paid in full
- If employee has both child support and credit garnishments, both can be honored if the child support is less than 25% of the employee’s disposable earnings
Wage Assignment (Wisconsin)
- Wage assignments are valid for six months and must be signed by the employee and the employer agreeing to honor the wage assignment
- If employee is married, his or her spouse must sign the wage assignment, and their signature must be witnessed by 2 disinterested witnesses
- An assignment must be revocable at the employee's will
Regardless of the type of involuntary deduction, it is a good idea to initial the order and indicate the date it was received. Be sure to supply the employee with the portions of the order that they should receive. If an employee no longer works for you, notify the agency issuing the order that they have terminated.
Remember that enforcement of involuntary garnishments is a joint federal and state responsibility. Federal law provides the standards which all states must meet or exceed to qualify for federal funding of programs. The Consumer Credit Protection Act provides this framework. Each state may have different specific regulations, so read your orders carefully and never assume anything.
- If you are paying an additional payroll to your employees for bonus, commissions, etc., be sure to check with the agency issuing any order to determine if you need to withhold additional funds from that employee’s check.
- If you have independent contractors on your payroll, be sure to withhold any involuntary deductions from their pay if you receive an order. You may not be required to withhold taxes, but you do need to follow regulations for involuntary deductions.
The most important thing to remember regarding any involuntary deduction is that you, as an employer, must withhold the amounts stated in the orders. You should not stop withholding until you are notified by the agency issuing the order that the employee has been released from it. Keep copies of all orders and letters related to them in the payroll file. It’s also important to know that an employer cannot discharge an employee simply for having any type of garnishment.
For information on these or other payroll deductions, contact your Schenck payroll professional or Libby Welhouse.
Elizabeth C. Welhouse, CPP, is a payroll specialist with Schenck. Libby specializes in determining the best payroll processing solutions to fit client needs. She implements new payroll client startups and does payroll software training, along with building and maintaining client exports.