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Garnishment and Tax Levy Guidelines for Payroll Professionals

May 19, 2022, 5:53 PM

Payroll departments need to understand garnishment laws and regulations to ensure that they are correctly garnishing employee pay, two payroll professionals said at the American Payroll Association’s 40th Payroll Congress on May 13.

Common garnishments include federal tax levies, student loan repayment, and creditor garnishments. Bankruptcy orders impact how employee wages are garnished.

Federal Tax Levies

Federal tax levies occur when employees fail to pay their taxes, said Larry White, APA’s payroll training director.

The Internal Revenue Service sends Form 668-W to employers to notify them of a federal tax levy, he said. The form contains six parts, and the employer gives Parts 3, 4, and 5 to the employee to complete and return to the employer within three business days.

Before that happens, employers should confirm that the employee still works for them, he added.

“Verify it’s your employee,” he said. “If the employee is not working there anymore, all you have to do is put everything back into the envelope and send it back to the IRS.”

Some employee wages are exempt from federal tax levies, said Corrinne Flores, the government affairs and wage garnishments director for ADP, LLC. The amount of wages exempt from tax levies can be calculated using IRS Publication 1494.

Employers should continue garnishing until they receive a Form 668-D from the IRS, she said. Employers should contact the IRS if they believe the levy is paid off but have not received a Form 668-D.

Student Loans

The U.S. Education Department has paused loan repayment through Aug. 31, but some guaranty agencies that administer the loans are not following federal guidance, Flores warned.

“The guaranty agencies are not always doing what the Department of Education is doing,” she said. “Who is impacted? The debtors are impacted but the employers were ultimately impacted. We’ve had situations where there was an extension to the loan pause, and the guaranty agencies said they weren’t going to adhere to that. So as a result, some employers started receiving restart notices and withheld. And then almost a month into it, the department told guaranty agencies that they were a part of the pause as well.”

Employers should keep an eye out for future guidance on restarting loan repayments, Flores said.

Employers might not receive garnishments once the loan repayments restart, she added. The department plans on giving debtors a fresh start by eliminating delinquency and putting debtors back in good standing. Garnishments might only be issued after borrowers fail to enter into a repayment agreement during their period of good standing.

“Ultimately, what we believe will happen is that Sept. 1 will happen, and then months later the trickle in of garnishments will happen because that’s how people originally got into delinquency,” she said. “They were unable to make those payments.”

Creditor Garnishments

Employers might receive a court order authorizing creditor garnishment if employees have unpaid debts, said White. Court orders for creditor garnishments vary by state, and employers should review the order thoroughly.

“If it’s not through a court order, it’s something you want to ignore or let the creditor know that you can’t garnish the money,” he said. “You need to read the order. States vary. Creditor garnishments come from the state essentially, and every state has a different way of doing it.”

The federal Consumer Credit Protection Act sets the maximum amount of disposable earnings that can be garnished to repay an employee’s debts, White said. The maximum amount under the CCPA is the lesser of 25% of the employee’s weekly disposable earnings or the amount by which the employee’s weekly disposable earnings exceed 30 times the federal hourly minimum wage.

Creditor garnishments have a lower priority than other types of garnishments, Flores added. If an employee also has a child support order that requires the employer to garnish the maximum amount of earnings under the CCPA, for example, the employer cannot garnish more earnings to satisfy the creditor garnishment court order.

Bankruptcy Orders

Employees who are unable to pay their debts might resort to bankruptcy, White said. Under a Chapter 13 bankruptcy, an employee develops a plan with the court to pay off debts.

The employer will garnish the employee’s wages and send a portion to a trustee in charge of the employee’s finances. Bankruptcy orders might require employers to garnish 100% of an employee’s wages, he said.

“In cases like that, don’t worry about the employee,” he said. “The trustee will provide living funds for the employee. Generally speaking, though, there’s only a certain amount they want withheld.”

If employers receive any garnishment orders or tax levies after receiving a bankruptcy order, they should contact the trustee to see if the new garnishment is included in the bankruptcy order, White added.

“You have to communicate,” he said. “That is the key when something like that happens.”

To contact the reporter on this story: Emmanuel Elone in Washington at eelone@bloombergindustry.com

To contact the editor on this story: William Dunn at wdunn@bloombergindustry.com