Garnishments are a big part of payroll processing and can be a confusing topic for many employers. Whether you use a third-party payroll processor or handle the garnishment process in-house, it’s important to understand what to do and how to avoid mistakes. Garnishments are based on court orders and collect debt such as child support, defaulted student loans, or tax obligations. They can also be found on bankruptcy orders and various monetary fines.
What Is a Garnishment?
Garnishments are legal processes that allow creditors to take money or property from a debtor to repay a debt. Creditors must first get a final judgment against a debtor in court to garnish their wages, assets, or bank accounts.
Wage garnishments are the most common form of garnishment. These occur when the IRS or a creditor is granted the writ of garnishment by the court to remove funds from an employee’s paycheck. Sometimes, a creditor may use a non-wage garnishment called a levy that can freeze an employee’s bank account or other financial assets to recover the funds owed.
Under federal law (Title III of the Consumer Credit Protection Act), garnishments can only affect an employee’s disposable income, which is their remaining salary after legally mandated deductions such as local, state, and federal taxes, social security, Medicare, and withholding for employer-sponsored retirement systems are taken out. Creditors can also not garnish Social Security, disability, or veterans pension benefits unless directly deposited into a bank account.
How Do I Know if I Need to Garnish an Employee’s Wages?
Courts or government agencies legally mandate wage garnishments. Your company will receive a court order, or a writ of garnishment, that states you must withhold an amount from an employee’s paycheck and send it directly to the person or organization owed money. There are different rules for garnishment calculations, depending on the type of debt and other factors. Some types of debt must be paid first, and other laws dictate priority in cases where an employee has more than one garnishment.
Once you receive an order, follow all instructions. Typically, you must verify that you employ the debtor and report how much they earn, then determine how much to withhold based on federal and state laws. You’ll also be required to inform the employee, who might have to sign a garnishment notification form. Garnishment deductions typically start with the next payroll cycle and should continue until the creditor receives the amount owed or the debt is paid in full. You must also keep accurate records and notify the debtor or legal authority if the employee’s employment status changes.
How Does Garnishment Affect Payroll?
The process for garnishing an employee’s wages starts when the creditor submits a request to the court or government agency. The proposal is then approved and becomes a Writ of Garnishment, which the creditor then serves to the employer. The writ also includes details of how much the debtor owes and what percentage of their paycheck will be garnished. Different types of debt require different rules for how much can be garnished. Creditors must also pay court fees to file a writ of garnishment and costs to serve the writ on the employer. Once the writ of garnishment is done, an employer must withhold the appropriate percentage of the debtor’s paycheck and send it to the creditor. The amount withheld from the salary should be listed in each pay period’s check stub. The garnishment deduction should be reflected on line items that say “Garnishment” so the employee knows why their paycheck was reduced. This is how garnishments payroll works. Creditors may also garnish an employee’s bank account, but this process requires a separate legal document called a Bank Garnishment. This documents how the creditor can contact the employer’s bank to place a hold on an employee’s accounts and deduct 100% of any funds in the history up to the amount shown on the garnishment notice. The amount withheld from the bank accounts will typically be higher than that from an employee’s paycheck.
How Much of an Employee’s Wages can be Garnished?
A creditor who wins a lawsuit against an employee and receives a judgment can serve your company with a garnishment order that requires you to withhold a specific amount from each paycheck and send it directly to the organization or person who owes money. Federal law mandates that employers comply with wage garnishment laws but stipulates how much of an employee’s income can be garnished weekly.
Disposable earnings are removed from legally required deductions (like federal and state taxes, social security and unemployment insurance) after subtracting mandatory employee benefits (e.g., health and life insurance, retirement plan contributions). Creditors can take up to 25 percent of an employee’s disposable earnings each week or 30 times the minimum wage, whichever is higher.
Creditors must also provide your company with proof that they are owed a debt before the court can order you to garnish an employee’s wages. This evidence can include a copy of the original court judgment or a letter from a lawyer that provides the details of what’s owed.
How do I Know if I’m Violating the Law?
Dealing with garnishments is a complicated process that requires a boatload of administrative work. It can also expose you to serious legal issues if you must handle them correctly.
A garnishment is legally withheld from an employee’s paycheck to pay off a debt such as child support, student loans, or delinquent taxes. It can also be used to pay off alimony and various monetary fines. There are many different types of garnishments, which are governed by both federal and state laws.
Garnishments are issued by a government agency or a court (in the case of defaulted consumer debts and some tax debts). Once an employer receives the writ of garnishment, they must immediately start withholding funds from employees’ checks.
Some garnishments have a set period that can be used to collect, so the employer must keep track of the expiration date and withhold only the amount allowed until that date has passed. Additionally, some garnishments have a priority based on the type of debt they’re trying to collect: child support and tax debts get higher priority than other debts.
