What is wage garnishment?

And what does it mean for your small business?

Did you know that 7% of US employees have had their wages garnished?

This may seem awkward, but there are circumstances under which the court may require you to garnish your employee’s wages. 

For instance, if an employee owes a debt or has a mandatory financial obligation, like child support, that they have failed to honor, the employer may be ordered to garnish their wages.

As a small business owner, the initial notification of a wage garnishment order may come as a shock. Knowing how to proceed and what you must do to stay compliant is important in such cases. In this guide, you’ll learn everything you need to know about wage garnishment. If you don’t have a payroll solution, we can help with that, too. Sign up today.

What Is Wage Garnishment?

Wage garnishment is a court order mandating that a portion of an employee’s income be diverted to resolve a debt. If a person fails to meet their financial obligations, such as a tax debt, the court may order the employer to withhold a certain percentage of their wages to pay the debt. 

In this case, the garnished money is directly sent to the garnisher to meet the employee’s obligations. Note that all salaried employees are subject to wage garnishment. While the process is usually initiated by the court, a court order may not be required in some situations. For example:

• The IRS can initiate wage garnishment without a court order for unpaid taxes.
• In some states, child support agencies are authorized to garnish an employee’s salary without a court order.
• For federal student loans, the loan holder can order the employer to deduct an employee’s wages without going through court.

Situations that typically call for wage garnishment include:

• Alimony
• Unpaid taxes
• The default of a student loan
• Child support
• Other consumer debts

When an employer receives a wage garnishment order, they must act promptly as it’s usually time-sensitive. Failure to comply within the allotted time frame may lead to penalties.

How much of your employee’s wages can be garnished?

Strict federal laws limit the amount of money creditors can take from an employee’s paycheck. However, the amount varies by state; some states offer more protection than others. Regarding federal limits, here’s what you can expect.

• Federal student loans – up to 15%
• Child support – up to 60%
• Consumer debts – 25% 
• Taxes – Determined by the IRS based on the individual’s standard deductions and the number of dependents in their household.

How do you protect your business?

As an employer, it’s crucial that you act on the garnishment order as soon as possible to avoid penalties. Here’s what you’re required to do to stay compliant with the IRS.

1. Inform your employee.

Your employee probably received a garnishment letter, but you’ll still need to inform them that money will be deducted from their paycheck. 

Keep in mind that garnishment can be stressful and embarrassing. Make sure to maintain privacy and provide counseling and other guidance/support the employee may need. 

2. Respond to the garnishment notice.

You may be required to fill out a form providing information about your business and the employee. Fill out the form and submit it within the stipulated time frame. 

3. Withhold and pay.

Determine how much to withhold and pay based on the garnishment order and your state’s laws regarding wage garnishment. This can be challenging, especially if you’re dealing with a garnishment order for the first time, so it’s recommended to have a payroll provider do it for you. 

How Payroll by Fingercheck can help 

Once you receive a wage garnishment notice, you can send it to Fingercheck by simply logging into your Fingercheck account, clicking on the Payroll tab, and navigating to the Forms and Notices section. Here, you can click on the Add Notice button and enter the particulars of your notice. Fingercheck will receive and process your notice. 

Our payroll system allows you to easily add new payee information for wage garnishment. Once added, Fingercheck will establish a direct deposit or generate a check payable to the garnisher. 

For more information on how to process wage garnishments with Fingercheck, you can contact our team at 1-800-610-9501 or use the chat option. 

If you need a payroll solution, we can help with that, too. Sign up today.