At some point in time, most businesses will have employees that are required to have money taken from their paycheck to repay an outstanding debt. This is called wage garnishment. Since most garnishments have specific rules surrounding them, they can be a difficult thing to manage. Let’s take a more in depth look at how wage garnishments work.
What are wage garnishments?
Wage garnishments are court or government ordered payments that are taken from an employee’s wages to pay back a certain outstanding debt. The payments must continue until the debt has been paid in full.
Some examples of debt that would need to be taken from an employee’s pay include:
- Child support payments
- Unpaid taxes
- Student loan defaults
- Credit card debt payments
- Outstanding medical bills
- Bankruptcy payments
What are employers responsible for?
As an employer, you will be responsible for a few things when it comes to wage garnishments. First, you must withhold a certain amount of money from an employee’s wages. Then, you must send it to the correct entity. Typically, the garnishment order will provide the amount to withhold and where to send the debt payment. Employers are to continue with the garnishments until they receive a notice stating that the debt has been paid.
The Department of Labor protects employees with garnishment laws in Title III of the Consumer Credit Protection Act. This act protects employees in ways including:
- Which wages are eligible for garnishment.
- Limiting the amount of wages that can be taken.
- Protecting the employee from being terminated because of a garnishment notice.
Employers who violate these laws are subject to fines.
Steps on how wage garnishments work
First, your business will receive an order to garnish an employee’s pay. Generally, most garnishments require you start withholding this money immediately.
Secondly, withhold the amount of wages per the order, or use the calculation sheets that are typically provided with a garnishment order. Garnishments are often given in percentages of an employee’s wages as opposed to a dollar figure. Only certain types of wages are eligible for garnishment. Examples include:
- Hourly wages
Furthermore, wage garnishments are a type of post-tax deduction. This means that the garnishment must be taken from the employee’s wages after you have withheld payroll taxes for this employee.
Joe earns $1,000 in weekly wages. After taxes are withheld, Joe has disposal income of $700. Per a court order, Joe’s employer must garnish 50% of his wages for child support payments. 50% of $700 =$350. The $350 garnishment is taken from Joe’s $700 disposable income and he takes home $350.
Finally, continue to take this garnishment of $350 from Joe’s wages until you receive a notice of fulfillment.
Wage garnishment limitations
The Department of Labor sets the maximum amount that can be taken from an employee’s pay for each type of garnishment. Key maximums to know are as follows:
The maximum amount that can be withheld for child support payments:
- 50% of employee’s disposal income if supporting a spouse or another child.
- 60% of disposal income if not supporting a spouse or another child.
- 5% maybe added to both figures if payments are more than 12 weeks late.
Bankruptcy and Tax Garnishments
The law specifies that its’ limitations on the amount of earnings that may be garnished do not apply to certain bankruptcy court orders, or to debts due for federal or state taxes.
The maximum amount for these garnishments is the lesser of two factors.
- Either 25% of the employee’s disposal income, or
- the amount by which an employee’s disposable earnings are greater than 30 times the federal minimum wage.
Getting help with garnishments
Wage garnishments are a complicated burden for business owners. With certain maximums that are allowed to be taken for different types of garnishments, and the order in which they need to be withheld, garnishments can cause any business headaches. Working with an experienced payroll provider is key to maintain compliance in proper garnishment withholding and reporting for your business. Please reach out to us if you need assistance.