You open the mail and see an order telling you to garnish an employee’s wages for an overdue debt. So, what does it mean to garnish an employee’s wages? And, what do you need to do?
What is garnishment?
Garnishment is a method of collecting money from a person who has overdue debts. When an employee has unpaid debts, a court or government agency might order you to withhold extra money from the employee’s paycheck. The withheld wages go toward repaying the employee’s debts.
Most garnishments are court ordered. The IRS, state tax collection agencies, and other non-tax government agencies can also order garnishments for unpaid debts.
Federal wage garnishment law protects employees by placing restrictions on the garnishment process. This is done under Title III of the Consumer Credit Protection Act. Employers who violate Title III may face a fine and/or jail time.
When does a garnishment apply?
Some common types of debt that lead to garnished earnings include:
- Unpaid taxes
- Overdue child support
- Defaulted government student loans
- Delinquent credit card loans
- Outstanding medical bills
Which wages can be garnished?
Most types of wages can be garnished. These include:
- Hourly wages
Tip income is generally exempt from garnishments.
Only an employee’s disposable earnings are subject to garnishment. Disposable earnings are what is left after you subtract legally required deductions from an employee’s wages, such as federal, state, and local taxes. When calculating disposable earnings, do not subtract non-required deductions, such as health and life insurance, and retirement plan contributions. This means an employee’s disposable earnings and net pay might be different amounts.
When to start garnishing employee wages
If you need to garnish an employee’s wages, you will receive a garnishment order telling you so. Withhold the employee’s wages according to the order.
You might have to answer the order. Basically, this is a response to receiving the order. You will need to send proof that you employ the worker and report how much they earn. You might also be asked to send other info.
When to stop garnishing employee wages
There are a few ways that a garnishment might end.
The garnishment order might list an end date. Make sure you carefully read the order and end on the correct date, even if the full debt isn’t paid yet.
Or, the agency that sent the order will later send you a “Notice of Termination of Wage Garnishment Order.” This notice will tell you when to stop the garnishment.
How much to withhold
The garnishment order will tell you how much to withhold from your employee’s wages. However, some of the employee’s wages might be protected from the garnishment to ensure that the employee has take-home pay. This means you might withhold less than the garnishment order states.
You must follow the garnishment limits so you do not withhold too much from the employee’s wages. The order should also include a calculation worksheet to help you make sure you withhold the correct amount.
Maximum wage garnishment amounts
The Consumer Credit Protection Act protects the garnishee by limiting the amount of wages that can be garnished. The maximum amount that can be garnished from wages depends on the type of debt.
Garnishments for judgment creditors
A judgment creditor is someone who wins a monetary award in a lawsuit. If a judgment creditor is garnishing your wages, they cannot take more than:
- 25% of the employee’s disposable earnings, or
- the amount that the employee’s disposable earnings exceed 30 times the federal minimum wage. Because the current federal minimum wage is $7.25, you cannot take more than the amount the employee’s wages exceed $217.50 ($7.25 x 30).
Let’s say an employee earns $500 in disposable income per week. Twenty-five percent of the disposable income is $125. The amount that the disposable income exceeds 30 times the federal minimum wage is $282.50 ($500 – $217.50). You can only garnish up to the lower of the two numbers. This means the most you can garnish from the employee’s disposable income is $125.
U.S. Department of Labor Fact Sheet #30 has a chart that can help you determine the maximum amount you can garnish.
Child support and alimony
If the employee does not support another spouse or child, up to 60% of disposable personal income can be garnished for child support or alimony. If the employee does support another spouse or child, you can garnish up to 50% of disposable earnings for alimony or child support withholding. For payments that are more than 12 weeks overdue, an additional 5% can be added.
Non-tax federal debts
Agencies that fall under the Debt Collection Improvement Act can garnish up to 15% of disposable earnings for debts owed to the federal government.
Department of Education agencies can garnish up to 10% of disposable earnings for defaulted federal student loans.
Non-tax federal debts are subject to federal garnishment laws for maximum wages garnished in a pay period. They are not subject to any state garnishment laws.
Exceptions to wage garnishment limits
Maximum garnishment restrictions typically do not apply to bankruptcy court orders nor to unpaid federal or state taxes. That means there is not a cap on how much can be garnished for unpaid taxes and bankruptcy court orders. Also, someone cannot get IRS wage garnishment help simply by declaring bankruptcy.
Garnishment laws make it illegal to fire an employee because of a garnished debt. However, this protection only applies if an employee’s pay is garnished for only one debt.
Some states have laws about garnishing employee wages. For example, the state might set lower garnishment limits or protect employees who have more than one garnishment.
If your state has garnishment laws that are more favorable to your employee, follow state laws. Otherwise, follow the federal laws. Make sure you look up garnishment laws by state to make sure you follow the correct laws.
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This article is updated from its original publication date of 2/29/2016.