Payroll and Garnishments: Basic Steps to Processing

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If you do not withhold properly on a garnishment, your company can be held liable for the entire amount of the garnishment

Protect Your Company and Yourself

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Garnishments◦ Court ordered◦ Involuntary◦ Different types

Do You Have a Court Order?

• Wage Assignments

• Voluntary– State law

governs– Different types

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Prioritize Check the limits

(Federal vs. State) Check when to

withhold and when to remit

Three Things You Must Do

Which law do I follow: Federal or State?

Answer: Whichever law gives the employee the most protection.

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• Bankruptcy• Support Order• IRS Levy

– unless state law dictates whichever is served first, second, etc.

• Federal Student Loan - Federal Non-Tax Debt (AWG)

• State Tax Levy - State Student Loan• Local Tax Levy• Creditor

Court Order Priority Chart

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Who’s On First

1. Creditor A - Jan. 15, 19982. Child Support A - Mar. 20, 19993. Child Support B - April 1, 19994. Federal Student Loan - June 10, 19995. Creditor B - June 30, 19996. Federal Tax Levy - Aug. 2, 19997. Child Support C - Aug. 2, 19998. State Tax Levy - Aug. 2, 1999

1. Child Support A2. Child Support B3. Child Support C4. Federal Tax Levy5. Federal Student Loan6. State Tax Levy7. Creditor A8. Creditor B

Date Received: Order Withhold:

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• Bankruptcy– no limit

• Support – 50% if there is a second family, 60% if not,

additional 5% for arrearage (some states limit this to 50% no matter if there is a second family or not)

• IRS Levy - – calculation based on 668-W and employee

actual income tax deductions

Federal Garnishment Limits

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• Student Loans– 15% - Federal– 10% - State

• State and Local Tax Levies– 25% of disposable or read the order

• Creditor– 25% of disposable or 30 times federal minimum

wage from disposable (some states are more restrictive)

Federal Garnishment Limits

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Takes priority (unless receive federal tax levy first)

Chapter VII exception Procedures

◦ Notify trustee of garnishments already in effect◦ Request instructions from trustee◦ Notify all other garnishments that you are to

discontinue to withhold

Bankruptcy Orders

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1. If you are not sure what to do – call the court or your attorney

2. Do exactly what the order says3. Bankruptcy order can take the employee’s

entire check.

Points to Remember for Bankruptcy

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Form 668W or Form 668C not returned within three (3) days:

Married Filing Separately One Exemption

Federal Tax LevyDefault Plan

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Gross wages

◦ Less: FITW, FICA, SITW, Medicare and any other statutory requirements (i.e. state retirement, etc.)

◦ Less: Existing Voluntary Deductions (exception: Monies going directly to savings account or savings bond

◦ Less: Existing garnishments – Child Support

Equals: Take-Home Pay

Federal Tax Levy Take-Home Pay

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Income $450.00◦ Taxes 101.95◦ Health ins. 50.00◦ 401(k) 9.00◦ United Way 5.00◦ Savings 100.00

Take Home Pay $184.05 668-W Chart (162.50) IRS Amount $ 21.55

Federal Tax Levy Calculations – allowing savings deduction

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Federal Tax Levy Calculations – disallowing savings deduction

• Income $450.00– Taxes 101.95– Health ins. 50.00– 401(k) 9.00– United Way 5.00

• Take Home Pay $284.05• 668-W Chart (162.50)• IRS Amount $121.55

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Federal Tax LevyAllowable Deduction Changes

Federal Income Tax Withholding◦ W-4 can be changed anytime

Voluntary Deductions◦ Can be cancelled/dropped

Add Union Dues◦ Requirement of employment

Health Insurance◦ Not in the employee’s control

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Federal Tax LevyIndependent Contractors

Form 668A – One shot attachment of all assets due and owing

Form 668C – Exempt chart will be used

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1. Give employee 3 days to return 668-W.2. Encourage employee to call IRS and work

something out3. Withhold until you receive a 668-D – release

from levy.

Points to remember for Federal Tax Levy

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Document receipt Give copy to employee Determine the “regularity” of the order Follow the terms of the order Note: If no federal tax levy is already in

place:◦ Withhold the maximum allowable disposable

income◦ Withhold your administrative fee, if allowed

Family/Child SupportFour Basic Steps

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Ordering state◦ Duration and amount◦ Person or agency to receive payments◦ Medical insurance support◦ Arrearage◦ Payment of fees or costs charged by CSEA,

court or custodial party’s attorney

Family/Child SupportWhen Two States Are Involved

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• Working state– When to begin withholding– How soon to remit– Limits– Prioritization– Processing fee– Terms and conditions not specified in the

order

Family/Child Support

When Two States Are Involved

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Family/Child SupportDefinition of Income

1996 expanded definition of income:◦ Any periodic form of payment due to an

individual, regardless of source, including wages, salaries, commissions, bonuses, workers’ compensation, disability, payments pursuant to a pension or retirement program and interest.

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Family/Child SupportSpecial Situations

Third party pays employee

Lump sum or irregular payments

Employee leaves company

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Lump Sum Payment ClauseBEWARE!!!!!

Employees In Arrears With Family Support Payments:

Entire amount of disposable earnings could be used to be applied to Family Support garnishments in which the employee has an arrears.

Note: Contact the court/agency on how to handle.

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Uniform Interstate Family Support Act (UIFSA)

All states required to adopt 1/1/98 Requires employers to honor all out of state Family

Support orders Requires states to adopt standardized form - 10/1/98 Requires states to set up a centralized collection office by

10/1/98, states that still have payments being processed through local courts by 10/1/99

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UIFSA, Continued

Employee’s work state will rule if ordering state has different time to withhold and remit

Employee’s work state will rule if ordering state has different calculation for disposable earnings

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UIFSA, Continued

Employee’s work state will rule if ordering state has different limit for exempt percentage

State cannot require you to change your pay period to meet order

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Take Home Pay vs. Disposable Pay Comparison

• Disposable Pay (all other):

• Gross minus:– Taxes– Medical insurance

premium (if a medical insurance child support order)

– Some AWG’s allow insurance and 401(k) deduction.

• Take Home Pay (IRS only):

• Gross minus:– Taxes– Existing voluntary

deductions– Existing Child

supports

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Jerry’s employer receives a child support order that requires $135 to be withheld per week. Jerry’s employer pays weekly and is supporting another family.

◦ Jerry’s gross wages $500.00 Less statutory taxes (-125.00)

◦ Disposable income $325.00◦ CCPA limit of 50%$162.50◦ Order requests $135.00

Jerry’s employer would withhold the lesser of the two limits = $135.00.

Calculation for Child Support Order

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A form of Child Support Specific amount can be ordered Noncustodial parent must advise court of

any changes in coverage Employer required to cover children***

Medical Insurance Support Orders

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Susan’s employer receives a medical insurance support order on Susan. The order instructs the company to use the disposable calculation of gross minus the taxes and the medical insurance premium Susan is paying for the children to be on the medical insurance. Susan is paid weekly and supporting a second family. The order is requesting $185.00 per week.

Calculation for Child Support with Medical Insurance Order

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Susan’s gross pay $500.00◦ Less: statutory taxes (-125.00)◦ Less: medical ins. Premium (- 75.00)

Disposable Income $300.00 CCPA limit of 50% $150.00 Order request $185.00

Employer would withhold the $150.00 because it is the lesser of the two calculations.

Calculation for Child Support with Medical Insurance Order

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Percentage method Equal division method Number of children method

Multiple Child Support Order Pro-ration Formulas

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Pro-ration Calculation – Percentage Method

• Employee owes1st - $100.00 = 28.5%2nd - 100.00 = 28.5%3rd - 150.00 = 43%

Total $350.00

• Limit = $171.4628.5% = $48.8728.5% = 48.8743% = 73.72

Total $171.46

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Rule of thumb:

All current support must be honored first. If current support cannot be honored – all pro-ration

go to current – nothing will go to arrearage even though you are withholding the whole 55% or 65%.

◦ Watch for the lump sum payment clause – it will take care of arrearage

When Pro-ration Includes Arrearage

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1. Is this a straight forward child support order or a medical insurance support order.

2. Use correct calculation for disposable3. If multiple orders exist, pro-rate between

them – each order gets a piece of the pie.

Points to remember for Child Support

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What Compensation* Is Included In Garnishable Wages?

¨ All Salary and Wages¨ Commissions¨ Bonuses¨ All Compensation In The Hands Of The Employer

Cash Tips are not included*Definition of wages varies from state to state

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Illustration Of Disposable Pay For Creditor Garnishments

Employee earns $500 per weekWithholdings: •Disposable Pay/Earnings:FITW $75.00 Gross Pay $500.00FICA $38.25 Taxes (133.25)State W/H $20.00 Disp. Pay $366.75Medical Ins $55.00 (30 x $7.25) (217.50)401(k) $50.00 $149.25

Apply limit (25%) $91.69

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Debt Collection Improvement Act of 1996 – AWG (Administrative Wage Garnishment)◦ Certify information about employee◦ Protection from discharge◦ Notice before garnishment withholding begins◦ Grace period after reemployment◦ Penalties for noncompliance

Federal Non-Tax Debt

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Protection from discharge Notice before garnishment withholding

begins Grace period after reemployment Normal pay period Penalties for noncompliance

State Student Loan

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Research Federal law vs. State law for protection

No discharge for one garnishment If more than one garnishment, establish

priority Withhold and remit according to order

Creditor Garnishment

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Calculation for Creditor Garnishment

• Tim’s employer receives a creditor garnishment on Tim. Tim gets paid weekly $500.00.

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Illustration Of Disposable Pay For Creditor Garnishments

Employee earns $500 per weekWithholdings: •Disposable Pay/Earnings:FITW $75.00 Gross Pay $500.00FICA $38.25 Taxes (133.25)State W/H $20.00 Disp. Pay $366.75Medical Ins $55.00 (30 x $7.25) (217.50)401(k) $50.00 $149.25

Apply limit (25%) $91.69

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Multiple Garnishments

Rule of Thumb:

Once a Family/Child Support is taking 25% or more of disposable income – no other garnishment can be honored

Exception: another Child Support, Tax Levies or Bankruptcy Order

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Tim’s employer now receives a state student loan garnishment in addition to the existing creditor garnishment.What do we do now?

Calculation for Multiple Garnishments

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Calculation for Multiple Garnishments

Employee earns $500 per weekWithholdings: •Disposable Pay/Earnings:FITW $75.00 Gross Pay $500.00FICA $38.25 Taxes (133.25)State W/H $20.00 Disp. Pay $366.75Medical Ins $55.00 (30 x $7.25) (217.50)401(k) $50.00 $149.25

Apply limit (25%) $91.69Limit 10% $36.68

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Now Tim’s employer receives a child support order requesting $125.00 per pay cycle.

How much will Tim’s employer withhold for these 3 garnishments?

Calculation for Multiple Garnishments

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Because the child support order is slightly above the 25% - the only order the employer will withhold on is the child support for a total of $125. The creditor and student loan cannot be honored for this check.

◦ If, however, Tim receives more money on the next

check the employer would re-calculate and possibly withhold on one or more of the other garnishments.

Answer

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1. Prioritize first.2. Calculate the limit vs. what you can

actually withhold from the employee.a. Remember, this can be different every pay

cycle. When the employee receives a different amount on their check – you will have to re-calculate these limits and amounts.

3. When in doubt, contact your attorney.

Points to remember