Priorities, Calculations Differ Among Garnishment Types
Garnishments can prompt employers to make enforcement decisions when deductions already are being made from an employee’s wages, said Larry White, CPP, the American Payroll Association’s director of payroll training.
Employers should recognize that the various types of garnishments have different levels of priority over wages, and that wages should not be withheld for garnishments with lower priority if those wages must be withheld to satisfy garnishments with higher priority, White said May 25 at the 29th annual American Payroll Association Congress in Salt Lake City.
Child support orders have the highest level of priority, followed in priority by bankruptcy orders, administrative garnishments for federal agencies, federal tax levies, state tax levies, local tax levies, and creditor garnishments. While federal law is not clear on the priority of student loan garnishments, such orders fall between federal tax levies and state tax levies, White said.
If a federal tax levy was in effect when a child support order was issued against the wages, the tax levy would have priority, White said. Deductions that employees can voluntarily elect to affect wages, such as deductions for union dues and charitable contributions, have lower priority than all involuntary deductions, he said.
Garnishments, which are involuntary wage deductions ordered by courts or government agencies, have different maximum deduction levels that can be applied against an employee’s wages. Employers must take these differing maximums into account when processing multiple garnishments with different priority levels against an employee’s wages, White said.
The maximum wages that can be deducted for child support orders, creditor garnishments, and student loan garnishments are based on an employee’s disposable earnings, which are gross earnings minus any deductions required by law, White said. Deductions required by law include federal, state, and local taxes. Other items, depending on state law, can be taken into consideration, White said. For example, Alaska treats amounts paid under a stock bonus, pension, profit-sharing, annuity, or similar plan providing benefits as amounts that would be subtracted from gross earnings to determine disposable earnings, White said.
Wages that already are subject to withholding for child support, tax levies, or bankruptcy orders are not considered to be deductions required by law for the purpose of calculating disposable earnings, White said.
Under the Consumer Credit Protection Act, the maximum percentage of disposable earnings that can be deducted to satisfy a creditor garnishment is 25 percent of the employee’s disposable earnings for the week or the amount by which the employee’s disposable earnings for the week exceed 30 times the federal hourly minimum wage of $7.25, or $217.50, White said. If a state’s laws are more favorable to the employee by requiring lower maximum amounts to be withheld from disposable earnings, the lower amounts would have the force of law, he said.
The recognized standard maximum deduction amount for student loan garnishments is the lesser of 15 percent of disposable earnings or 30 times the federal hourly minimum wage, White said.
The maximum percentage of disposable earnings that can be deducted for child support orders under the Consumer Credit Protection Act depends on whether the employee has a second family and whether the employee has at least 12 weeks of support in arrears. If an employee has no second family and does not owe at least 12 weeks of support, the maximum is 50 percent; if both these conditions are present, the maximum is 65 percent.
Because of differing priority levels and differing maximum percentages among garnishments, there can be situations in which a garnishment with lower priority will be able to be enforced against only part of an employee’s disposable earnings, as well as situations in which a garnishment with lower priority will not be able to be enforced against an employee’s disposable earnings at all, White said.
For instance, if an employee’s disposable earnings of $1,000 are already subject to a child support order for $300, a creditor garnishment cannot be applied against the disposable earnings, White said. This is because 25 percent of $1,000 is $250, and because the child support order has higher priority than the creditor garnishment and is already in effect against the same disposable earnings, White said.
If a child support order for $200 already is in place against disposable earnings of $1,000 and a creditor garnishment asking for 25 percent of disposable earnings to be deducted is received, $50 could be deducted for the creditor garnishment because 25 percent of $1,000 is $250, and $250 minus $200 that already is being deducted for child support is $50, White said.
Federal Tax Levy Calculations
The Internal Revenue Service sends employers a copy of Form 668-W, Notice of Levy on Wages, Salary, and Other Income, when a federal tax levy is to be enforced. The form instructs employers to send the employee’s take-home pay minus exempt amounts to satisfy the tax obligation.
In general, whichever deductions already are in place at the time the levy is to be put in effect are exempt from the levy, White said. The take-home pay for the purpose of calculating the amount of earnings subject to the levy is gross earnings minus any deductions that were already in place before receipt of the levy, he said. Also exempt from the levy are unemployment benefits, workers’ compensation payments, certain pension and annuity payments, certain disability and welfare payments, and pre-existing child support payments.
Employees will use part of Form 668-W to indicate how many personal exemptions they would like to claim for the purpose of the levy, and based on the number of the employee’s personal exemptions, the frequency of the pay period, and the employee’s filing status, employers would use Publication 1494 to determine the basic amount of the employee’s take-home pay that would be exempt from the levy, White said.
The take-home pay minus the exempt amount is the total that would be subject to the federal tax levy, White said. Amounts must continue to be deducted for a federal tax levy until the employer receives Form 668-D, Release of Levy, White said.