What is a Wage Deduction?

Wage deduction is a process that retains a portion of an employee’s earnings to pay their debts. These are often enforced by courts or government entities when a person does not respond to other requests for payment in a timely manner.

Definition and Examples of Wage Deductions

Wage deduction is a legal or fair procedure in which a portion of a person’s income is withheld from them and paid to the debtor. In most cases, the garnishment is ordered by the court. However, it can also be initiated by the IRS, state tax collection agencies, or other federal agencies.

For example, let’s say Michael is required to pay child support to Maria but has not paid the amount owed in full. Maria can go to court and get the court order that adorns Michael’s salary. In turn, she would receive a reduced salary while Mary would receive a deducted share. The deductions will continue until the debt is paid off.

How Wage Garnishments Work

Wage deductions serve as a means of ensuring debts will be repaid. This is often one of the last steps taken to get someone to pay who has not responded to another payment request.

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Wage Deduction Process

The wage deduction process begins when a debt is owed and the person does not make payments as agreed. Unpaid debt can come from a variety of sources, such as medical bills, auto loans, civil judgments, child support orders, student loans, state tax bills, or federal tax bills.

Non-government entities need to get a court order to garnish wages while government entities can garnish without court assistance.

Once wage deductions are initiated, the person’s employer will be notified and will be required to withhold a certain amount of the employee’s earnings until the debt is paid in full. Earnings can include wages, commissions, bonuses, salaries, retroactive merit raises, and lump sums. If you don’t want your paycheck to be garnished, there are steps you can take such as talking to your creditors or challenging the deduction.

CCPA Restrictions on Wage Deductions

Title III of the Consumer Credit Protection Act (CCPA) limits the percentage of disposable wages a person can make per week.

One-time wages is the amount of salary remaining after necessary deductions such as taxes, Medicare, Social Security, and State Unemployment Insurance taxes.

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In most cases, the maximum amount that can be decorated is 25% of your spendable income. However, your wages cannot be garnished if your disposable income is 30 times the federal minimum wage or less. For example, the federal minimum wage is $7.25, so if you work 30 hours a week and earn $217.50, no deductions can be applied.

The 25% maximum rule applies once you’ve earned at least 40 times the federal minimum wage. If you earn between 30 and 40 times the federal minimum wage, wages above 30 times the figure can be garnished.

Here’s an example: Let’s say Nina owes $2,000 on medical bills and her salary is deducted by court order. He makes $500 in disposable income each week, so 25% ($125) is deducted from each paycheck. After 16 weeks, he will pay off his debt and the garnishment will be removed.

However, if Nina made only $250 per week, her wages would exceed the federal minimum wage times 30 ($217.50), but below the minimum wage times 40 ($290). Thus, only amounts over $217.50 will be deducted each pay period, which is $32.50 per week. He will pay off his debt in 62 weeks.

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If you owe child support or benefits, up to 50-60% of your salary can be deducted, plus 5% for payments that are more than 12 weeks late. Further, the limit does not apply to certain bankruptcy court orders or federal and state tax debts.

A federal agency that collects non-tax debt can only order an employer to pay up to 15% of a person’s income without a court order. In addition, federal law prohibits employers from terminating employees for taking pay cuts.

Key Takeaways

  • Wage deductions involve forcibly deducting an employee’s income to pay debts.
  • In most cases, up to 25% of a person’s income can be withheld per week.
  • The amount limit does not apply to federal or state tax debt and some bankruptcy court orders.
  • Wages cannot be garnished if you multiply the federal minimum wage by 30 or less.
  • Wage deductions for child support or support orders can take up to 65% of earnings.
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