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©2016 The Payroll Advisor1
Payroll Deductions: What You Can and Can’t Deduct
from Employee PayPresented on Wednesday, November 2, 2016
2©2016 The Payroll Advisor
Housekeeping
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Credit QuestionsToday’s
topicSpeaker
To earn RCH credit you must
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Be watching using your unique URL
Certificates delivered by email, to registered email, by December 2nd
Our Focus For Today
Taxes
Child Support
Tax levies
Creditor Garnishments
Voluntary Wage Assignments
Uniforms
Lodging
Shortages/Breakage
Overpayments
Advanced Vacation Pay
Loans to employees
Employee purchases
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About the Speaker
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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
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Voluntary—Employee asks you to deduct…health insurance deduction for example
Involuntary—someone other than employee orders you to deduct…taxes for example
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Taxes8
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Which are
mandatory, which
are a courtesy, and
which ones the
employee controls
Federal Income Tax
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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%
2016 Wage base is $118,500
Maximum to withhold for 2016 is $7,347.00
Employer matches dollar for dollar at 6.2% for 2016
Must be taken for all subject wages
Established 1960’s
Current rate is 1.45%
No annual wage base
Employer matches dollar for dollar
Must be taken for all subject wages
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Social Security (OASDI) Medicare
Medicare
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Established 1960’s
Current rate is 1.45%
No annual wage base
Employer matches dollar for dollar
Must be taken for all subject wages
Additional Medicare Tax
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Established 2013
Current rate is 0.9%
For wages in excess of $200,000
No employer matching
Must be taken for all subject wages
Nonresident Aliens
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Services performed in U.S. that otherwise are covered employment under FICA are not excluded because the employee is a nonresident alien
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
Totalization agreements may come into play as well
State Income Tax
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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
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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
Works
Resides
Local Taxes
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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
Garnishments17
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Child support: the
limits but not beyond
Tax levies: federal
and state
Creditor
garnishments: how
many can you honor
and how often
Voluntary
wage
assignments
for “payday”
loans: when
are they
required to
be honored
Federal Tax Levies
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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
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What is Meant by Take Home Pay
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Subtract the following in calculating take home pay: Taxes
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
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State Tax Levies
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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
COULD come on a tax levy form or COULD be a letter
May have priority over creditor garnishments or may not
May be able to collect a fee
READ THE GARNISHMENT CAREFULLY
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Garnishments and the CCPA
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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
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Limits on Child Support
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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
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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
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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
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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
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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
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Creditor Garnishment Calculation
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Check the chart
30 times federal
minimum wage
State Limits
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State(s) RequirementDE, 15% of wages
IL 15% of gross wages or amount which disposable earnings exceed 45 times of the higher of
federal or state minimum wage
WI 20% of disposable earnings
AL, AZ, CA, CO, DC, GA, ID, IN, KS,
KY, LA, MD, MS, MO, MT, NE, NY,
OH, OK, OR, SC, TN, UT, VT, WYLesser of 25% of disposable or amount exceeds 30 times federal minimum wage
WALesser of 25% of disposable or amount exceeds 35 times federal minimum wage
CT, IA, ME, MN, NM, ND, VA, Lesser of 25% of disposable or amount exceeds 40 times the higher of federal or state minimum
wage
NV, NH, Lesser of 25% of disposable or amount exceeds 50 times the higher of federal or state minimum
wage
WV, Lesser of 20% of disposable or amount exceeds 30 times federal minimum wag
SD, Lesser of 20% of disposable or amount exceeds 40 times federal minimum wag
AK, FL, HI, States limits within code based on dollar amounts
AR, MI, NC, No limits set in code
MA, $125 exempt from levy each pay period
NJ $48 per week are exempt; 10% if wages exceed $7,500 per year
PA, TX Not permitted except in certain circumstances
RI Up to $50 are exempt from attachment
More State Examples
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Alaska: Notwithstanding the increased exemption amounts provided for weekly disposable earnings and cash and other liquid assets, the exemption for weekly disposable earnings is $743 and the maximum monthly exemption for cash and other liquid assets is $2,970
Florida: up to $750 per week of the disposable earnings of a head of family are exempt from attachment or garnishment. Disposable earnings greater than $750 a week cannot be attached or garnished unless the employee agrees in writing;
Hawaii: The maximum that employers can withhold is 5 percent of the first $100 of disposable wages per month, 10 percent of the next $100 per month, and 20 percent of all sums in excess of $200 per month. Disposable earnings are the amount of earnings remaining after the deduction of any amount required by law.
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However, In North Carolina…
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The courts of North Carolina are not permitted to order an employer to withhold wages for other types of debts such as car loans, credit card debt, and other personal debt items. While the North Carolina courts are not permitted to garnish wages based on these debts, creditors in other states may be able to get an order of garnishment under their own states’ laws. It is not a violation of the North Carolina Wage and Hour Act for an employer to withhold an employee’s wages if required to do so by law. If a court from another state issues a valid order under that state’s laws requiring an employer to withhold a North Carolina employee’s wages for payment of a debt, the employer does not violate the North Carolina Wage and Hour Act by obeying that order.
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State Fees
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Collection of a fee for the employer is sometimes permitted—states with no provisions to collect fees include:
AL, AK, CO, CT, DE, HI, ID, KY, MD, MA, MS, MT, NE, NM, NY, OH, SC, VT, WV, WY
Some states have special provisions for fees such as:
IA only permits witness fees
NH only permits for collection of overpayment of SUI benefits
NC permits only for debts to public hospitals or public assistance payments
PA for collection of taxes only
TN permits for public employers only
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State Fees
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State Fees PermittedArizona $5 each pay period from nonexempt earnings
Arkansas $2.50 per pay period
California $1.50 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 for each 30-day period
Louisiana $3 from nonexempt income each payment garnishment is in effect
Maine $1 per check issued and forwarded to creditor
Michigan $6 fee paid by plaintiff at the time a writ of garnishment is served
Minnesota $15 paid by creditor to employer at time of service of garnishment
Missouri Greater of $8 or 2% of amount withheld. Taken from employee’s wages
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
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
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
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May also be a fee to collect for the state or court or plaintiff in the case
Read the garnishment
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What if there is more than one?
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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
Voluntary Wage Assignment
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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”
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Uniforms37
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When the employer pays for
it and when the employee
furnishes it
Deducting for Uniforms
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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
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Deducting for Uniforms—States
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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
NJ: No can do
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Lodging40
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Lodging: when is it
part of the
employee’s wage
and when is it a perk
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
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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
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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
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Executive Housing
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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
Shortages/Breakage45
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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
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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
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State Requirements
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States RequirementAL, AK, AZ, AR, DE, DC, FL,
GA, ID, IL, IN, KS, MA, MI, MS,
MO, NE, NV, NH, NM, OR, PA,
RI, SC, SD, TN, TX, UT, VT, VA,
WA, WV
No provisions
CA, ME, MD, OH Does not permit deductions
CT, HI, WY Does not permit deductions to cover loss as result of customer wrongdoing
CO Permits if police and court actions are taken
IA, KY Not from a common till, cash box or registered operated by two or more
employees
LA, MT May if employee willfully or negligently damaged goods or proper or if
employee convicted of theft
MN, WI Not permitted unless authorized by employee or employee found guilty in
court
NJ For lost ID cards only
NC Must give 7 days notice/cannot drop wages below 85% of amount required
by Wage Hour law
ND, OK, Employee must authorize at time of deduction
Overpayments48
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The employee was overpaid
so you can just take the
money back or can you?
Overpayments: FLSA Requirements
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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 and overtime
FLSA
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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
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Every state will vary
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
IN—you are a creditor at 25%
MI—you follow all other current deductions
Advanced Vacation Pay52
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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
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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
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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 Purchases55
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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
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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
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California
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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 wages
Employee Purchases
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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 them
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Are There Any Questions?
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How Can Ascentis Help Me?
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Ascentis Payroll has a number of different employee level configurations to help you comply with income tax and garnishment withholding. Whether you have a few employees that fall under these rules or lots of employees each with different and complex rules.
Income Tax Withholding
• Non-resident alien rules
• Wage exemption settings for all tax types (useful for student visas)
• Extensive local tax withholding with rules based on the home and work state combination
• Ability to add non-residency certificates for multiple states at an employee level Garnishment Support• Federal and state tax levies
• Configurable creditor garnishment calculations to support many states at a time
• Employee level maximum percentage limits
• Automatic calculations for multiple support orders
To earn RCH credit you must
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