Handling payroll deductions
There is some important information you should be aware of when you are handling payroll deductions.
Deductions that are required by Federal and State law:
Employers by law must deduct social security taxes (FICA) and wage withholding taxes from the paychecks of employees. These deductions are made based on the amount of wages that are actually paid to the employee and also at the time the payment is made. If an employer fails to deduct the required taxes they are liable for the amount of tax that should have been withheld. They are also liable for penalties and interest on the amount.
Deductions required by court order:
Upon receipt of a court order, federal and local laws allow third parties to file legal claims against an employee's wages requiring the employer to deduct a specific amount from the employee's wages. And then pay these amounts to the third party. Employer's should deduct this amount from the employee's "disposable income", which is determined by deducting the employee's employment taxes from his/her pay. The most common types of court-order deductions are child and spousal support payments, support payments for a spouse, tax levies, federal student loans and garnishment by other creditors.
Court-ordered deductions generally involve a court order that requires the employer to withhold a specific amount from an employee's paycheck, then deliver the order to the employer. After the court order is delivered to the employer, the employer begins withholding of the specified amount from the employee's paycheck and transmission of the withholding back to the court. The employer must report any changes that affect the employee's income immediately to the court and wait for further instructions. Employer's must continue to withhold the appropriate withholding until notified by court order terminating the payments. Employer's that do not comply with a withholding order can be charged with contempt of court and also may be liable for the amounts that were not withheld.
Minimum Wage Considerations:
There are restriction on payroll deductions in accordance with the federal Fair Labor Standards Act (FLSA). Deductions, other than the reasonable cost or fair market value of board, lodging or other facilities customarily furnished to the company's employees, that benefit the employer are not permitted to the extent that they reduce an employee's cash wages below the minimum wage during a non-overtime week. One example is dry-cleaning costs associated with company uniforms and tools that are required for the employee's job. Deductions of this type can be made during weeks that an employee earns overtime compensation, but only to the extent such deductions do not exceed the amount the employer could deduct in a non-overtime week.
Overpayment of wages:
If an error occurs and the employer pays an employee too much during a specific pay period and the employee earns minimum wage, the employer may not recover the overpayment through payroll deduction unless the employer either obtains a judgment against the employee and receives a garnishment order against their wages or waits until the employee is paid above minimum wage and deducts the amount overpaid from the "excess'.
Special situations: Check with your accountant and/or legal counsel for assistance handling special situations such as; tax withholdings for non-resident aliens; settlement agreements; garnishment of government employees; processing of out-of-state garnishment orders; multiple orders for deductions, along with how to prioritize the various orders and bankruptcies.
It is important to immediately read child support orders, tax levies or garnishment orders once you are notified. These papers contain a lot of information and they have strict time frames, in which you must respond. Call the agency or court and ask for clarification if you do not fully understand or have questions concerning these orders. If you are not able to receive answers or clarification, call your attorney and/or tax consultant.