Payroll Garnishment Explained: How it Affects Employees and Employers

When it comes to tough workplace conversations, payroll garnishment is high up on the list. Informing your employee that you have to send part of their paycheck to creditors or government agencies can be uncomfortable. It can also make a difficult situation more stressful. Let's explore what employee payroll garnishment is and its impact on your team and business.

What is Payroll Garnishment?

Payroll garnishment, also known as wage garnishment, is a legal process initiated by a court order or government directive that requires you to withhold part of an employee’s paycheck to satisfy a debt. Common reasons include:

• Defaulted student loans

• Child support

• Court-ordered fines

• Unpaid taxes

Once you receive the proper documentation, you’re legally obligated to withhold a specific percentage or fixed dollar amount from the employee's compensation when you run payroll. You need to send it to the specified agency on time to avoid penalties.

Types of Employee Payroll Garnishment

The different types of garnishments follow different rules and have varying priority levels when multiple orders exist. Here are some examples:

• Child Support Garnishments: These orders typically allow garnishing up to 50% of disposable earnings for employees supporting a spouse or child, or 60% if they do not. An additional 5% is possible if payments are more than 12 weeks overdue.

• Tax Levies: Tax levies from the IRS and state tax agencies don’t require a court order and can take a larger portion of pay than other garnishments.

• Student Loan Garnishments: Federal student loans can garnish up to 15% of an employee’s paycheck without court approval. Private lenders have to get a court order first.

• Court-Ordered Garnishments: These include judgments for unpaid credit cards, medical bills, traffic violations, and other debts. They adhere to the standard 25% limit under federal law, although state laws may be more restrictive.

• Bankruptcy Garnishments: When employees file for bankruptcy, an automatic stay typically halts most garnishments immediately. However, certain obligations, such as child support, may continue.

The Consumer Credit Protection Act (CCPA) limits the amount creditors can garnish from employee wages. Generally, they can take up to 25% of disposable earnings or the amount by which weekly earnings exceed 30 times the federal minimum wage, whichever is less.

The Legal Process of Payroll Garnishment

The garnishment process starts when creditors get legal approval to take wages, typically by winning a court judgment. From there, the order lands on your desk as the employer. Here are some of the steps involved:

1. Receive Garnishment Order: You’ll get a court order or agency notice by mail with details on how much to withhold and where to send payments. It'll also tell you how long the garnishment lasts.

2. Verify the Order: You usually have 5–10 business days to review and confirm the order with the issuing agency. You should verify the employee information and start the process. 

3. Notify the Employee: Share the garnishment order with your employee in writing and explain the amount. Your employee can challenge the garnishment in court or claim exemptions based on financial hardship. 

4. Deduct Garnishment from Wages: Set up the withholding amount to deduct from the employee’s paycheck in your payroll software or contact your payroll provider. If employees successfully challenge garnishments, you should stop withholding money. You may have to return amounts already collected.

5. Send Payments: Send the withheld money to the right creditor or agency according to the payroll garnishment instructions. 

6. Lift the Garnishment: The wage garnishment remains in effect until your employee settles the debt or the court order expires. It also stops when the employee leaves your company.

How to Comply with Garnishment Laws

When you receive an order for an employee payroll garnishment, you're required to comply with the federal and state laws. Here are some best practices:

Set up Clear Procedures

Compliance begins with having procedures in place for handling garnishment orders. Designate specific team members to manage these processes and train them on federal and state requirements.

Create a Tracking System

Implement a system that tracks active garnishments. Keep an eye on payment due dates and total amounts collected. Maintain detailed records of all correspondence and payments related to garnishment. Courts and agencies often request this documentation during audits.

Calculate Garnishment Amounts Carefully

To calculate payroll garnishment, use the employee's disposable earnings. It's the amount that remains from your employee's pay after you subtract the deductions required by law, including payroll taxes and benefits. You don't include voluntary deductions like retirement contributions or health insurance premiums unless required by law. 

Send Payments to Creditors on Time 

Follow the specified payroll garnishment rules to ensure timely payments. Most garnishment orders require monthly payments, but some specify different schedules. Late payments can result in penalties and complications. When multiple garnishments exist, follow priority rules established by federal and state laws.

Simplifying Payroll Garnishment With Justworks

Employee payroll garnishment is manageable when supported by clear policies and proper training. Tools that automate calculations and deadlines help you stay compliant while protecting employee privacy. Justworks simplifies payroll and HR tasks, including garnishment payments and compliance management, so you can focus on running your business. Get started with Justworks today.