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Payroll Deductions: What Can and Can’t Deduct From Employee Pay

Presented Wednesday, August 16, 2017

Housekeeping

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Our Focus For Today

Child Support

Tax levies

Creditor

Garnishments

Voluntary Wage

Assignments

Uniforms

Meals/Lodging

Shortages/Breakage

Overpayments

Advanced Vacation

Loans to employees

Employee purchases

About the Speaker

Vicki M. Lambert, CPP, is President and

Academic Director of The Payroll Advisor,

a firm specializing in payroll education

and training. The company’s website

www.thepayrolladvisor.com offers a

subscription payroll news service which

keeps payroll professionals up-to-date on

the latest rules and regulations.

Types of Deductions

Voluntary—Employee

asks you to

deduct…health insurance

deduction for example

Involuntary—someone

other than employee

orders you to

deduct…taxes for

example

Taxes8

Which are

mandatory, which

are a courtesy, and

which ones the

employee controls

Federal Income Tax

Under what is called “Pay-as-you-go plan

enacted in 1943

16th amendment to the Constitution—1909/1913

Federal Income Tax

Internal Revenue Code or IRC

Required by law to be deducted based on

employee’s Form W-4 or supplemental tax rates

Nonresident aliens may have different rates or

exemptions due to treaties

Federal Insurance Contributions

Act (FICA Taxes)

Established in the 1930’s

Current rate is 6.2%

2017 Wage base is $127,200

Maximum to withhold for 2016 is $7,886.40

Employer matches dollar for dollar at 6.2% for 2017

Must be taken for all subject wages

Established 1960’s

No annual wage base

Employer matches dollar for dollar

Must be taken for all subject wages

Social Security (OASDI) Medicare

Additional Medicare Tax

Established 2013

For wages in excess of

$200,000

No employer matching

Must be taken for all

subject wages

Nonresident Aliens

Services performed in U.S. that otherwise are

covered employment under FICA are not

excluded because the employee is a nonresident

However, “students” under F, J, M and Q visas

are excepted from the definition of employment

for FICA if in connection with the purpose for

which the student is admitted to this country

State Income Tax

Most employers are required to withhold state

income tax from employee’s wages—9 states have

no tax

Special forms for employee to claim exempt from

state income tax

Special form for military spouse to use to claim

exempt from state income tax

Forms for nonresidents of the state

Reciprocal agreement forms

For Example

WI has agreement with IL

Resident of IL works in WI but

does not want WI tax taken

out—completes Form W-220—

NO WI tax is withheld

Employer may but IS NOT

required to withhold for IL

Wisconsin

Illinois

Resides

Local Taxes

Some are paid by the employee, some the employer and some are levied on both the employee and employer. However, not all are deducted from the employee’s wages but are still owed by the employer. Most are based on the payroll in some way.

May require determination of coverage such as county the employee lives in

Garnishments16

Child support: the

limits but not beyond

Tax levies: federal

and state

Creditor

garnishments: how

many can you honor

and how often

Voluntary

assignments

for “payday”

loans: when

are they

required to

be honored

Federal Tax Levies

Publication 1494 is used to determine the amount exempt from levy

Changes each year

Use the exemptions and filing status the employee submitted on the Form 668-W

What is Meant by Take Home Pay

Subtract the following in calculating take home pay:

Voluntary and involuntary deductions in effect before the levy is received

Increases in preexisting deductions beyond the employee’s control

Condition of employment deductions that come after the levy is received

Direct deposit is not counted

State Tax Levies

CCPA limits do not apply to state tax levies under 15 USC 1673(b)(1)(c)

COULD BE 25% of disposable or the amount that exceeds 30 times the federal minimum hourly wage

COULD BE anything they want it to be—Example KY allows employee to keep $125/week Plus $60 for each dependent

COULD come on a tax levy form or COULD be a letter

State Tax Levies

Disposable income could match federal or may not even give a definition

May have priority over other creditor garnishments or it may not

May be able to collect a fee

Read the garnishment carefully

Garnishments and the CCPA

Consumer Credit Protection Act (CCPC) limits the

amount that can be deducted from “disposable

pay” for child support and creditor garnishments

Limits apply if more than one garnishment is in

effect

Does not apply to federal or state tax levies

Limits on Child Support

CCPA Limits:

50% of disposable earnings if

employee has second family

60% if does not

Add 5% if in arrears to both

State may be lower

50% is the common amount

Disposable Earnings

Disposable Income = gross

pay - mandatory deductions.

Disposable income is the

amount of earnings

remaining after subtracting

certain mandatory

deductions from an

employee's gross pay.

Disposable Earnings

Mandatory deductions include federal, state and

local taxes; unemployment insurance; workers'

compensation insurance; state employee

retirement deductions; other deductions

determined by state law.

Note that disposable income is not necessarily the

same as net pay. An employee may have a

deduction taken from his pay that is not

mandatory, such as union dues or a car loan

payment.

Allowable Disposable Income

Allowable disposable income is the maximum

available for child support withholding. In most

cases, the amount ordered to be withheld will be

less than the allowable disposable income amount,

and the ordered amount can be withheld without any

problem. Even if the withholding order specifies a

higher payment, the allowable disposable income is

the most that may be withheld.

Creditor Garnishments

CCPA limits apply except where state is lower

25% of disposable or the amount that exceeds 30 times the federal minimum hourly wage

Some states have severe restrictions

Federal chart furnished-as of July 2009

Creditor Garnishment

Calculation

Check the chart

30 times federal

minimum wage

MS AL GA

States following federal rules

State rules mirror federal

Creditor Garnishment Limits by State

25% disposable or amounts exceeding 50 times state/fed

min wage

25% of disposable or amounts

in excess of 40 times state/fed

min wage

25% disposable or amounts exceeding 35 times state/fed

min wage

Unique state rules

Follows federal rules with limits for head of household

States With Unique State Rules

AL: 25% of resident’s wages

CA: 25% of disposable or 50% amount exceed 40 times state or localminimum wage

DE: 15% of total wages

IL: 15% of gross wages or amount over 45 times state min wage

MA: 85% or amount of 50 times fed/state min wage is exempt

NC: Follows federal except orders from public hospitals and public assistance are limited

NV: Weekly gross <$770 exempt amount 82% or 50 times fed min wage. >$770 75% is exempt eff.10-1-17

PA: 10% for debts to landlords, taxes to municipalities or HEAAA debt

SC: Garnishments not allowed for consumer debts

SD: lessor of 20% of weekly disposable or amount over $346 less $25 for each depending living with employee

TX: Current wages exempt from garnishment

WI: 20% of disposable unless household income below fed poverty level then exempt

WV: 20% of disposable or amount over 50 times fed min wage

MS AL GA

No provisions for fees

Permit fees

Creditor Garnishment Fees by State

Have unique fees for certain items

State Fees

State Fees PermittedArizona $5 each pay period from nonexempt earnings

Arkansas $2.50 per pay period

California $1.00 for each payment

District of Columbia $2.00 for withholding order

Florida $5.00 for 1st deduction, $2.00 each deduction thereafter

Georgia $50 or 10% of amount paid into court (whichever is greater) but not to exceed $100 as reasonable attorney’s fees or expenses

Illinois 2% of amount to be deducted

Indiana Larger of $12 or 3% of total amount to be deducted ½ of fee from employee, ½ of fee from amount due creditor

Kansas $10 per pay period up to $20 per month, payable by creditor if can’t be taken from employee

Louisiana $3 from nonexempt income each payment garnishment is in effect

Maine $1 per check to be taken from amount withheld

Michigan $6 fee paid by plaintiff at the time a writ of garnishment is served. Amount is $35 for writs issued after 9-30-15

Minnesota $15 paid by creditor to employer at time of service of garnishment

Missouri One time fee not to exceed $20 withheld from wages in addition to garnishment

Nevada $5 paid by creditor to employer at time a writ of garnishment is served. Employer entitled to$3 per pay period not to exceed $12 per month

New Jersey 5% for compensation towards expenses and services in processing each payment

North Dakota $10 paid by creditor when employer is served with garnishment summons

Oklahoma $10 from employee’s funds for answering a garnishment summons

Ohio $3 per pay period payable by employee $1 for property garnishment payable by creditor

Oregon $2 processing fee for each week a payment is made unless withholding reduces below minimums. Must collect after last payment is made

Rhode Island $5 paid by employee for each writ of garnishment

South Dakota $15 for garnishee summons being served

Texas Lessor of actual costs or $10 from disposable earnings

Utah $10 for a single garnishment or $25 for continuing garnishment paid by creditor directly to employer

Vermont $10 for district court cases, $50 for superior court cases payable by creditor

Virginia $10 for each garnishment summons served

Washington $10 processing fee for 1st disbursement and $1 for each subsequent disbursement. $20 for first payment; if continuing lien $10 at time of second

payment

Wisconsin $15 garnishee fee from creditor for each garnishment or extension

State Fees

May also be a fee to

collect for the state or

court or plaintiff in the

Read the garnishment

What if there is more than one?

Handling multiple creditor garnishments is a matter

of state law

Can be first in time—first in line

Usually cannot do more than one creditor

garnishment at a time

Some states will allow the employer to hold onto

garnishments to wait their “turn” while others do not

Garnishment will specify terms in most cases

For Example--Alaska

If an employer is served with a writ of garnishment

while a continuing lien is in effect, the employer must

answer the writ with a statement that he is holding no

funds and must report when all previous liens are

expected to terminate. The subsequent garnishment

will take effect upon the termination of all prior liens.

(A.S. 09.38.040)

Voluntary Wage Assignment

Are not the same thing as a court-ordered

garnishment

Are voluntary so not covered under CCPA limits

Can be revoked at any time by employee so watch

for this

State sets the limit and the rules

State can forbid employer to honor, especially for

“small loans”

Uniforms37

When the employer pays for

it and when the employee

furnishes it

Deducting for Uniforms

FLSA does not give credit against minimum wage

for uniforms

Deductions for the cost of purchasing, renting or

maintaining a required uniform are not allowed if the

effect is to reduce an employee’s wages below the

minimum hour rate for that workweek

States can have minimums as well

Deducting for Uniforms—States

States that DO NOT permit include: IA, IN, KS, ME, NH, NJ, NV, OR, RI

States that require written authorization include: AK, AZ, CO, CT, DE, HI,

ID, IL, KY, MD, MI, NC, ND, NM, OH, OK, PA, TN, TX, UT, VA, VT, WA,

WV, & WY

AK: may deduct security deposit for uniforms is based on written

agreement, does not exceed actual cost and does not cut into minimum

wage or overtime

CA: If an employer requires that an employee wear a uniform, the

employer must pay the cost of the uniform.

MA: no deposit shall be required for a uniform and employer will pay for

dry cleaning but not wash and wear

MN: up to $50 and must be returned if employee terminates

Meals and Lodging40

Meals: When they

become part of the

employee’s wages

Lodging: when is it

part of the

employee’s wage

and when is it a perk

Meals and Lodging-Federal

Can deduct from wages or credit against minimum wage the reasonable cost of board and lodging furnished to the employee

In order to use the credit:

Facility must be primarily for the benefit of the employer

Employee must accept voluntarily

Lodging must be employee’s residence on a permanent basis

Lodging

Value can be excluded if:

Furnished on business

premises

Furnished for the employer’s

convenience

Employee must accept as

condition of employment

Does not apply if employee can

choose additional pay instead

Business Premises

On your business premises

generally means the

employee’s place of work

For Employer’s Convenience

Must look at all the facts and circumstances

Must be done for a substantial business reason other than to provide additional pay

Even if contract calls for it

A written statement is not enough to prove fact

Condition of Employment

Employee needs to live on

the business premises to be

able to properly perform their

duties

Example: employee must be

available at all times and

could not perform required

duties without the lodging

Example

A hospital gives its employee,

Joan, the choice of living at the

hospital free of charge or living

elsewhere and receiving a cash

allowance in addition to her

regular salary. If Joan chooses to

live at the hospital value cannot

be excluded. She does not need

to live at hospital to perform her

duties

Executive Housing

Any type of “lodging”

provided is usually wages

unless for the “convenience

of the employer” discussed

earlier

Includes vacation homes,

corporate “housing”, condos,

boats in vacation places etc.

especially for executives

De Minimis Meals

Can exclude the value of any

occasional meal or meal money if it

has so little value that accounting for it

would be unreasonable or

administratively impractical

Must take into account how frequently

provided to all employees

De Minimis Meals

Examples of De Minimis meals

includes:

Coffee, doughnuts, or soft drinks

Occasional meals or meal money

to enable an employee to work

overtime—cannot be based on

hours worked

Occasional parties or picnics for

employees and guests

Meals on Premises

May exclude the value of meals if:

Employee’s place of work

For employer’s convenience

Depends on facts and circumstances

Substantial business reason other than provide additional pay

Need more than written statement

Meals on Premises

If more than half of employees are furnished meals for employer convenience may treat all meals as for convenience of employer

MS AL GA

Do not permit

No provisions

Meals and Lodging Credits Against Minimum Wage

Sets monetary limit

No minimum wage

Reasonable cost of meals and lodging

Varies, for certain employees only

State Requirements

AR Up to 30¢ per hour

CA Furnishes exact amounts on minimum wage poster

CO Lodging may not exceed $25 per week; meals must be reasonable costs no profit to employer must be taken before

deduction is made

CT Up to 85¢ for a full meal; 45¢ for a light meal

ID Meals: $3 a meal/$60 a week; Lodging:$4.50 a day/$30 a week; $90 a week for meals and lodging

IL Applies to seasonal camp counselors who reside on premises

MA Meals: B-$1; L-$1.75; D-$1.75 Lodging: $30/week solo; $25/week 2 employees; $20/week 3 or more employees

MN Applies to hotels, motels, lodges and resorts

MT Up to 40% for lodging, not permitted for meals

ND Up to $18 a day

NH Full room/board: $45/week or $6.45/day Meals: $39.45/week or $1.88/meal Lodging: $10.88/week or $1.80/day

NJ Full room/board: $219.40/week; $94 for lodging only/week; $25.10/meals (3 per day) B/L:$7.50; D-$10

NM Agricultural employees: reasonable costs

NV Meals: $1.50/day; B-35¢; L-45¢; D-70¢

NY Based on wage order

OK Cannot exceed 50% of minimum wage

SD Cannot exceed 50% of minimum wage

VT Full room and board: $86.47/week; Full room: $25.03/week; Full board: $71.54/week; Nightly lodging: $4.17; B-$3.03; L-

$3.41; D-$3.78

WI Lodging: $58/week or $8.30/day non-opportunity/agricultural employees Opportunity employees:$47.20/week or $6.75/day

Shortages/Breakage54

The employee came up

short so they have to

cover that right?

You broke it so you have

to pay for it, legal or not

Deducting for Breakage or Shortages

FLSA requires employees be paid minimum wage

regardless of such items as cash shortages or

breakage—cannot take below applicable minimum

wage to take out of paycheck

States will differ depending on the state—some

follow federal while others are more restrictive

Most states do not address the issue at all

Falls under anti-wage theft laws also

MS AL GA

Are deductions permitted for breakages?

Yes with employee written authorization required

Yes if due to willful, dishonest act, theft or court

proceeding

MS AL GA

Are deductions permitted for shortages?

Yes with employee written authorization required

Yes if due to willful, dishonest act, theft or court

proceeding

Yes if employee has sole control over cash drawer

Overpayments58

The employee was overpaid

so you can just take the

money back or can you?

Overpayments: FLSA Requirements

DOL accepts inadvertent overpayments will occur

If the employer and the employee do not agree

that the wages were overpaid or if employee

refuses to repay the amount legal options must be

considered

If both agree the wages were overpaid there are

methods to recoup

May deduct principle even if it cuts into minimum

wage or overtime

Interest, administrative costs or attorney fees may not be deducted if it cuts into minimum wage or overtime

The existence of the loan or advance must be verified to every extent possible

Wage and Hour Division addressed this issue in Opinion Letter No. 1916 in 1998

Recouping loan or advances on wages does not affect status as an exempt employee and does not violate salary basis requirement

Overpayments: The States

Every state will vary: states with no provisions include: AL, CT, DE, FL, GA, IA, ID, LA, MA, MD, MO, MS, MT, NM, OH, RI, SC, SD, TN, UT, VA, WV &WY

Must research wage and hour law as well as court cases

Most require prior notification as does the FLSA—there may be time limits as well

Most require permission in writing

California & New York don’t even try unless you are really sure

IN—you are a creditor at 25%

KY—no limit but employee must receive min wage for each hour worked

Me—no more than 10% of net unless employee agrees

MI—you follow all other current deductions; only 15% of gross for pay period

NH—no more than 20% of gross pay per pay period

PA—cannot go below minimum wage

WA—only 90 days from initial overpayment to detect and implement plan

Advanced Vacation Pay62

The employee knows the

vacation hours were

advanced so we can take

them back when the

employee quits can’t we?

Deducting for Advanced Vacation

Federal: If an employee is paid vacation before it

is earned it is an advance on wages if the

employee terminations

(Excerpt) In the situation where an employee is granted vacation pay

prior to that individual’s established date of entitlement, with the

understanding that the pay constitutes an advance on pay and the

employee quits or is terminated before that date, employer may recoup

the advanced vacation pay, even where such recoupment cuts into MW

or OT pay as required

The States

New York Example State: Always verify

vacation rules in addition to overpayment rules for each state

Usually falls under “overpayment rule”

CA & NY don’t even think about it!

Loans and Employee

Purchases65

Loans: what terms can

be set while the

employee is still active

and what can be taken

when the employee

terminates

Employee Purchases:

active employees and

terminated employees

Loans to Employees

Federal: same as for overpayments and

advance on wages

State: Same as for overpayments and

advance on wages – be careful of terminating

employees

Creditor garnishment rules may come into play

when it comes to balloon payments and

terminating employees

California

Under most circumstances CA law prohibits an

employer from deducting from an employee’s wages

any debt the employee may owe the employer.

Barnhill v. Saunders began with withholding for a

loan upon termination

California State Employees’ Association v. State of

California extended to cover overpayment of

Employee Purchases

Federal: same as for overpayments and

advance on wages

State: to recoup costs usually follow same as

overpayments or loans

Be careful of states where they restrict access

to purchases

Employer cannot force employee to buy from

Are There Any Questions?

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