Garnishments, Tax Levies, and the Give and Take of Payroll

Tax levies and garnishments come in a variety of different forms, and employers must know what to do if they receive one, two payroll experts said May 17.

Employers might receive a tax levy if an employee fails to pay their taxes and a garnishment order if an employee has child support obligations, student loans, or owes money to creditor, said Larry White, director for payroll training at PayrollOrg. Additionally, an employee’s garnishments might change if the employee declares Chapter 13 bankruptcy and the employer receives a bankruptcy order.

“Garnishments are nothing employers have control over,” he said. “Garnishments are nothing employees have control over. Employees started it, and employers have to deal with it.”

If payroll professionals receive an income withholding order and they do not recognize the listed individual, they should contact their accounts payable department in case the order applies to an independent contractor, he added.

White and Corrinne Flores, the government affairs director for wage garnishments with ADP, LLC, offered procedural guidance for tax levies, student loans, creditor garnishments, and bankruptcy orders in a presentation at PayrollOrg’s 41st Payroll Congress in Denver.

Tax Levies

Employers required to withhold wages because of a federal tax levy will receive Form 668-W, Notice of Levy on Wages, Salary, and Other Income, White said. Employees must complete part of the form, but employers must withhold even if employees fail to return their portion of it.

Once employers begin withholding under Form 668-W, they must continue doing so until they receive Form 668-D, Release of Levy/Release of Property from Levy, he added. Federal tax levies generally have priority over all other garnishments except for child support orders issued prior to the tax levy.

“Even if an employee tells an employer that they are entering into a voluntary wage agreement with the IRS, wait until Form 668-D comes in,” Flores added. “Then, you can decide whether or not to honor that voluntary wage agreement, but not until you have that release.”

Unlike federal tax levies, state tax levies vary greatly, and employers should carefully read every one they receive, White said.

Even states that do not have income taxes can still issue tax levies to collect past-due fees or other taxes, Flores added.

It is not uncommon for employers to receive both a federal and state tax levy for the same employee, White noted. Generally, state tax levies do not have priority over federal tax levies, although some do under certain circumstances.

Federal Student Loans

Currently, employers generally must not garnish wages for federal student loans, White said. However, employers must still garnish wages if an employee had any private or state student loans.

The federal Education Department should inform employers later this year when garnishments for federal student loans will restart, Flores added. Even when federal student loan collections restart, however, most employers will not have to garnish wages immediately because the department intends to give borrowers a one-year grace period, she said.

Creditor Garnishments

Another common form of garnishment — creditor garnishments — are similar to state tax levies in that they vary by state, Flores said.

In fact, three states, Pennsylvania, South Carolina, and Texas, do not allow creditor garnishments, White added. That being said, these states still accept creditor garnishments from other states.

“These states do allow creditor garnishments but not within those states,” he said. “So, if you have a creditor garnishment in Illinois and it is transferred to Texas where the employee is residing, Texas will accept the creditor garnishment. However, Texas won’t issue creditor garnishments.”

Bankruptcy Orders

Bankruptcy orders occur because an employee filed Chapter 13 bankruptcy, Flores said. Employers that receive a bankruptcy order should stop withholding for all garnishments except for child support.

Regardless of whether employers receives a tax levy, garnishment order, or bankruptcy order, they should inform employees as a best practice even if such notification is not required, White suggested.

“Wouldn’t you like to know whether your next paycheck is going to be smaller than the last one was?” he said. “Generally speaking, your employees will already know anyway.”