As a small business owner, one of the topics you may come across while calculating payroll is wage garnishments. A wage garnishment is “any legal or equitable procedure where an employer withholds some portion of a person's earnings for the payment of debt.” Understanding wage garnishments is vital because there are specific rules you need to follow when it comes to processing payroll.
Understanding Wage Garnishments
Essentially, wage garnishment is a debt that your employee owes. Common wage garnishments include:
- Alimony
- Child support
- Defaulting on a student loan
- Unpaid taxes
As a small business owner, you are responsible for withholding a percentage of an employee’s compensation based on the requirements mandated by the government. If you receive a notification about a wage garnishment, it’s crucial that you act quickly because these are usually time-sensitive debts that can lead to penalties if not withheld at the proper time.
Note: Any voluntary wage assignments that are chosen by an employee, such as medical insurance or pre-tax benefits, are not considered wage garnishments.
How Wages Are Garnished
When it comes to garnishing wages, the amount due will come from an employee’s disposable earnings. Disposable earnings refer to any money remaining after legally mandated deductions such as federal, state, and local taxes, state unemployment insurance contributions, and Social Security taxes. The amount of money that makes up the disposable income includes salaries, bonuses, sales commissions, along with any earnings that come from retirement plans and pensions.
When it comes to how much money can be garnished, it varies depending on the type of garnishment. Each state has its own laws for wage garnishment requirements, so as an employer it’s important that you’re aware of the requirements for your state and comply. Even though your employee may have a lot of debt, they will always be allowed to keep a certain percentage of their paycheck for general living expenses.
Frequently Asked Wage Garnishment Questions for Employers
Can I fire an employee due to garnished wages?
Under the Consumer Credit Protection Act (CCPA) requirements, employers cannot fire employees due to wages being garnished for a single debt. However, there are no provisions in place for employees who have multiple wage garnishments. Again, there are some protections that your state may allow these employees.
How will I be notified if an employee’s wages need to be garnished?
Typically, you will be notified of a wage garnishment via court order or IRS levy. Remember to start withholding and remitting the payment as soon as you receive it. If you have any questions, the paperwork you receive should include contact information that you can use to help you out.
What are my obligations as an employer?
In addition to acting quickly on the garnishment, you must give written notice to your employee to let them know. You may be given a form to use depending on the garnishment, but you can also draft a letter that details the specifics of the wage garnishment order, the amount that will be withheld each paycheck, and the length of time this will happen. If you get help with payroll, you’ll either want to let that person or payroll company know.
Bottom line
Wage garnishments may not be something you have to deal with frequently as a small business owner. If the situation comes up, you will want to know how to withhold these garnishments properly. If you find yourself struggling, you can reach out to a professional to ensure that your plan and procedures are compliant. If you aren’t sure how to handle this, working with a payroll service can help.
