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Garnishments for Unpaid Taxes


Garnishments for Unpaid Taxes

If an employee does not pay his or her federal or local income taxes, the employer may receive a notification from the IRS to garnish that person's wages in order to repay the taxes. The garnishment will cover not only the original amount of unpaid taxes, but also any penalties and interest expenses added by the government.


A garnishment for unpaid taxes takes priority over all other types of garnishments, except for child support orders that were received prior to the date of the tax garnishment. If a business receives orders from multiple taxing authorities to garnish an employee's wages and there are not enough wages to pay everyone, then the orders are implemented in the order in which they were received.

The "Notice of Levy on Wages, Salary, and Other Income," Form 668-W, is the standard form used for notifying a company to garnish an employee's wages. It has the following six parts:

If an employee fails to remit parts 3 and 4 of Form 668-W to the employer, the employer is required to calculate the employee's exempt amount of wages under the assumption that the person is married, filing separately, with one exemption. These assumptions result in the smallest possible amount of exempt wages, so employees should be strongly encouraged to turn in parts 3 and 4 in order to avoid having the maximum amount withheld from their pay.

When a Form 668-W order is received to garnish an employee's wages, the payroll staff must first determine if any wages are not subject to the order. Only 15 percent of the following types of wages are subject to a tax payment order issued by the IRS, and they are completely exempt from an unpaid tax order issued by a state government:

  • Armed forces disability benefits

  • Pension and annuity payments as specified under the Railroad Retirement Act

  • Unemployment compensation benefits

  • Welfare and supplemental Social Security payments

  • Workers' compensation benefits

Once these types of wages have been accounted for, the payroll staff must determine which deductions can be made from an affected employee's pay before determining the amount of the tax levy. Allowable deductions include:

Once the applicable deductions have been used to reduce an employee's wages to the amount to which the tax levy will be applied, the payroll staff should use an IRS-supplied table to determine the amount of net wages that are exempt from the tax levy. This table is shown in Exhibit 8.2.

Click To expand
Exhibit 8.2: Table for Figuring the Amount Exempt from Levy on Wages, Salary, and Other Income

Example. Molly Gammon has not been paying her federal income taxes, so her employer, the Red Herring Fish Company, receives a notice from the IRS, informing it that she owes the government $10,000 in back taxes. The company is obligated to withhold this amount and remit it to the IRS. The payroll manager must calculate the amount of the tax levy to withhold from each paycheck. He obtains the following information from her pay records:

Weekly salary

$ 1,000

Federal and state income taxes

192

Social Security and Medicare taxes

77

Medical insurance deductions

40

Stock purchase plan deductions

50

Net Pay

$ 641

To calculate the amount of her net pay that is exempt from the tax levy, the payroll manager turns to the table for figuring exemptions, shown in Exhibit 8.2. Molly is an unmarried head of household with four exemptions. For a weekly pay period, this gives her an exemption of $363.46 from the tax levy. This means that $277.54 is subject to the tax levy, which is calculated as her net pay of $641, less the exemption of $363.46.

If Molly subsequently asks to have her stock purchase plan deductions increased, the net change will not reduce her tax levy, since this change occurred after receipt of the tax levy notice. However, if the company becomes unionized subsequent to the tax levy date, and Molly is required to pay union dues as a condition of her employment, then the tax levy will be reduced by the amount of her dues. Finally, if her medical insurance deduction increases, the tax levy will also be reduced by this amount.

Once a Form 668-W is received, the company is obligated to begin withholding the mandated amount of taxes from an employee's next paycheck, even if the applicable wages were earned prior to receipt of the form. The company should forward the withheld amount to the IRS, with the employee's name and Social Security number noted on the check.

If the employee leaves the company while this tax levy is still being deducted, the employer must notify the IRS of this event, and if possible forward the name and address of the new employer to the IRS. If the employee continues to work for the company, the IRS will inform the company when to stop making these deductions on a Form 668-D.

If an employer for any reason does not withhold and forward to the IRS the periodic garnishments required by Form 668-W, the company will be held liable for the amounts that it should have withheld, in addition to incurring a stiff penalty.


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