Payroll Deductions: What You Can and Can't Deduct From Employee Pay

Payroll Deductions: What You Can and Can't Deduct From Employee Pay FEATURED FACULTY: Vicki M. Lambert, CPP, President and Academic Director, The Payroll Advisor (702)-408-2750 vicki@thepayrolladvisor.com

Vicki M. Lambert, CPP, President and Academic Director, The Payroll Advisor Vicki M. Lambert, CPP is President and Academic Director of The Payroll Advisor a firm specializing in the training of payroll professionals. With over three decades of hands-on experience in all facets of payroll functions as well as over 20 years as a trainer and author, Ms. Lambert is a sought-after and respected voice in the practice and management of payroll issues. She has conducted open market training seminars on payroll issues across the United States as well as serving as an in-house trainer for businesses such as Sun Microsystems, Fox Studios, Disney, County of Riverside and the City of Hesperia. Ms. Lambert currently produces and presents payroll related audio seminars, webinars and webcasts for clients, APA chapters and business groups throughout the country. Ms. Lambert is an adjunct faculty member at Brandman University in Southern California and is the creator of and instructor for their Practical Payroll Online program, which is approved for recertification hours by the APA.

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Payroll Deductions: What You Can and Can t Deduct from an Employee s Pay Presented Monday, December 7, 2015 1 About the Speaker 2 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. As an adjunct faculty member at Brandman University, Ms. Lambert is the creator of and instructor for the Practical Payroll Online payroll training program, which is approved by the APA for recertification credits. 1

Our Focus For Today 3 Taxes Child Support Tax levies Creditor Garnishments Voluntary Wage Assignments Fringe Benefits Uniforms Meals/Lodging Shortages/Breakage Overpayments Advanced Vacation Pay Loans to employees Employee purchases Anti-wage theft laws Types of Deductions 4 Voluntary Employee asks you to deduct health insurance deduction for example Involuntary someone other than employee orders you to deduct taxes for example 2

5 Taxes Which are mandatory, which are a courtesy, and which ones the employee controls Federal Income Tax 6 Under what is called Pay-as-you-go plan enacted in 1943 16 th 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 3

FICA Taxes 7 Federal Insurance Contributions Act System of old-age, survivors, and disability insurance and hospital insurance Old-age, Survivors, and Disability Insurance (OASDI) social security Hospital insurance is Medicare and Additional Medicare Tax OASDI 8 Established in the 1930 s Current rate is 6.2% 2015 Wage base is $118,500 Maximum to withhold for 2015 is $7,347.00 Employer matches dollar for dollar at 6.2% for 2015 Must be taken for all subject wages 4

Medicare 9 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 10 Established 2013 Current rate is 0.9% For wages in excess of $200,000 No employer matching Must be taken for all subject wages 5

Nonresident Aliens 11 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 State Income Tax 12 Most employers are required to withhold state income tax from employee s wages Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, Washington & Wyoming have no state income tax Tennessee does not require income tax withholding 6

Employee Choices for State Income Tax 13 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: 14 IL has agreement with WI Resident of WI works in IL but does not want IL tax taken out completes Form IL-W-5-NR NO IL tax is withheld Employer may but IS NOT required to withhold for WI 7

States with Local Tax Requirements WA MT ND ME OR ID SD MN WI NY VT NH MA CA NV UT WY CO NE KS IA MO IL MI OH IN KY WV VA PA DE MD NJ RI CT AZ NM OK AR TN SC NC MS AL GA TX LA FL AK Has local taxation HI 15 Local Taxes 16 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 8

17 Garnishments 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 Garnishments and the CCPA 18 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 9

Limits on Child Support 19 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 20 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. 10

Disposable Earnings 21 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. Item Disposable Income Net Pay Gross Pay $760.00 $760.00 Federal Income Tax (95.00) (95.00) Social Security (45.57) (45.57) Medicare (10.66) (10.66) CA PIT (36.75) (36.75) CA SDI (6.08) (6.08) Cafeteria plan deduction Pretax (25.00) Union dues (10.00) Savings bond (25.00) 401(k) (30.00) Credit union car loan (50.00) Total mandated deductions (194.06) Total payroll deductions (334.06) Totals $565.94 $425.94 22 11

Allowable Disposable Income 23 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. 24 Example of Allowable Disposable Income Weekly gross pay is $760. Weekly child support due is $200. Mandatory deductions total $194.06 Employee-parent is single and does not owe back child support. The law of the state where the employee works (the "principal place of employment" state) determines which deductions are mandatory. In California, the example on the next slide would change if the union dues, for example, are mandatory deductions. 12

So the Math Would Be 25 Gross pay - mandatory deductions = disposable income: $760 - $194.06 = $565.94 Disposable income x CCPA % limit = allowable disposable income: $565.94 x 50% = $282.97 $282.97 - $200.00, so the full $200 is withheld for child support. 26 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 Federal Tax Levies 13

27 What is Meant by Take Home Pay 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 28 14

29 Federal Tax Levy Calculations Our Example: Employee Charlie receives $1,300 every two weeks. A tax levy of $15,000 is received. Charlie claims married filing jointly with 2 exemptions. He has the following deductions: Deductions for Charlie 30 Fit $100.00 SS $ 77.50 Medicare $ 18.13 SIT $ 40.00 401(k) plan 3% $ 39.00 Health Ins. $ 50.00 Total $324.63 15

31 Tax Levy Would Calculate Take Home Pay $975.37 ($1,300 - $324.63) Exempt from Levy $792.31 (From 2015 Chart) Amount subject to levy $183.07 ($975.37 - $792.31) 32 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 16

33 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 34 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 17

35 Creditor Garnishment Calculation Tony has a creditor garnishment of $1,000 to honor and has $700 in disposable income and is paid biweekly: 36 First check the chart Creditor Garnishment Calculation 18

37 Creditor Garnishment Calculation Step 2: Determine the lesser of disposable income minus 30 times federal minimum wage or 25% of disposable income: Disposable income minus 30 times minimum wage: $700 - $217.50 = $482.50 25% of disposable income: 25% x $700 = $175 38 Creditor Garnishment Calculation $175.00 is the lesser of these two amounts. We can take the $175 to satisfy the garnishment 19

But What if There s a Child Support Order? 39 Tony's child support withholding obligation is 180.00/week. Deduct $180 for child support from Tony's $700 pay Difference between allowed amount for garnishment and the child support deduction taken: $175 - $180 = -$5 The child support deduction of $180 has already exceeded the allowed amount for garnishment; therefore nothing may be withheld for Tony's creditor garnishment. Let s Do One Where He Has the Money 40 Tony's child support withholding obligation is $140/week. His weekly disposable income is $1,000. A creditor serves a garnishment against Tony for a $1,000 debt. Deduct $140 for child support from Tony's $1,000 pay 20

41 Then Do the Garnishment Calculation Determine the lesser of: Disposable income minus 30 times minimum wage: $1000 - $217.50 = $782.50 25% of disposable income: 25% x $1000 = $250 $250 is the lesser of these two amounts. Difference between allowed amount for garnishment and the child support deduction taken: $250 - $140 = $110 $110 can be withheld for Tony's creditor garnishment State Limits 42 DE, IL State(s) WI AL, AZ, CA, CO, DC, GA, ID, IN, KS, KY, LA, MD, MS, MO, MT, NE, NY, OH, OK, OR, SC, TN, UT, VT, WY WA CT, IA, ME, MN, NM, ND, VA, NV, NH, WV, SD, AK, FL, HI, AR, MI, NC, MA, NJ PA, TX RI Requirement 15% of wages 15% of gross wages or amount which disposable earnings exceed 45 times of the higher of federal or state minimum wage 20% of disposable earnings Lesser of 25% of disposable or amount exceeds 30 times federal minimum wage Lesser of 25% of disposable or amount exceeds 35 times federal minimum wage Lesser of 25% of disposable or amount exceeds 40 times the higher of federal or state minimum wage Lesser of 25% of disposable or amount exceeds 50 times the higher of federal or state minimum wage Lesser of 20% of disposable or amount exceeds 30 times federal minimum wag Lesser of 20% of disposable or amount exceeds 40 times federal minimum wag States limits within code based on dollar amounts No limits set in code $125 exempt from levy each pay period $48 per week are exempt; 10% if wages exceed $7,500 per year Not permitted except in certain circumstances Up to $50 are exempt from attachment 21

More State Examples 43 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; More State Examples 44 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. 22

However, In North Carolina 45 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. State Fees 46 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 23

State Fees 47 State Arizona Arkansas California District of Columbia $5 each pay period from nonexempt earnings $2.50 per pay period $1.50 for each payment $2.00 for withholding order Fees Permitted Florida Georgia Illinois Indiana Kansas Louisiana Maine Michigan Minnesota Missouri Nevada New Jersey North Dakota Oklahoma Oregon Rhode Island South Dakota Texas Utah Virginia Washington $5.00 for 1 st deduction, $2.00 each deduction thereafter $50 or 10% of amount paid into court (whichever is greater) but not to exceed $100 as reasonable attorney s fees or expenses 2% of amount to be deducted Larger of $12 or 3% of total amount to be deducted ½ of fee from employee, ½ of fee from amount due creditor $10 for each 30-day period $3 from nonexempt income each payment garnishment is in effect $1 per check issued and forwarded to creditor $6 fee paid by plaintiff at the time a writ of garnishment is served $15 paid by creditor to employer at time of service of garnishment Greater of $8 or 2% of amount withheld. Taken from employee s wages $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 5% for compensation towards expenses and services in processing each payment $10 paid by creditor when employer is served with garnishment summons $10 from employee s funds for answering a garnishment summons $2 processing fee for each week a payment is made unless withholding reduces below minimums. Must collect after last payment is made $5 paid by employee for each writ of garnishment $15 for garnishee summons being served Lessor of actual costs or $10 from disposable earnings $10 for a single garnishment or $25 for continuing garnishment paid by creditor directly to employer $10 for each garnishment summons served $10 processing fee for 1 st 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 48 May also be a fee to collect for the state or court or plaintiff in the case Read the garnishment State Fees 24

What if there is more than one? 49 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 50 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) 25

Voluntary Wage Assignment 51 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 52 Fringe Benefits Handling Health Insurance or group term life 26

Deducting for Fringe Benefits 53 Fringe benefits are voluntary deductions Employee must authorize the deductions for such items as health insurance or group term life insurance Exception Health insurance for a dependent child under a child support order or medical support order 54 Uniforms When the employer pays for it and when the employee furnishes it 27

Deducting for Uniforms 55 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 56 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 28

57 Meals and Lodging 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 58 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 for primarily for the benefit and of the employer Employee must accept them voluntarily Lodging must be employee s residence on a permanent basis 29

59 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 60 On your business premises generally means the employee s place of work 30

For Employer s Convenience 61 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 62 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 31

Example 63 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 64 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 32

De Minimis Meals 65 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 66 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 33

Meals on Premises 67 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 68 If more than half of employees are furnished meals for employer convenience may treat all meals as for convenience of employer 34

69 Meals and Lodging States CA: furnishes chart on minimum wage poster for exact amounts that may be deducted CO: Lodging may not exceed $25 per week; meals must be reasonable cost with no profit for employer and must be consumed before deductions are permitted MO: FMV of meals and lodging may be deducted as credit towards min wage so long as are voluntarily received for the private benefit of the employee 70 Shortages/Breakage 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 35

71 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 State Requirements 72 States AL, 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 Requirement No provisions CA, ME, MD, OH CT, HI, WY CO IA, KY LA, MT MN, WI NJ NC ND, OK, Does not permit deductions Does not permit deductions to cover loss as result of customer wrongdoing Permits if police and court actions are taken Not from a common till, cash box or registered operated by two or more employees May if employee willfully or negligently damaged goods or proper or if employee convicted of theft Not permitted unless authorized by employee or employee found guilty in court For lost ID cards only Must give 7 days notice/cannot drop wages below 85% of amount required by Wage Hour law Employee must authorize at time of deduction 36

73 Overpayments The employee was overpaid so you can just take the money back or can you? Overpayments: FLSA Requirements 74 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 37

FLSA Requirements 75 When the employer makes a loan or advance of wages it may deduct the principle from the employee s wages The principal may be deducted even where such deduction cuts into minimum wage or overtime due under FLSA FLSA 76 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 38

Facts of the Case 77 Employee was overpaid a substantial sum over 27 pay periods. Claimed did not notice because check was direct deposited W/H opined that employer was free to recoup overpayment if standards are followed FLSA 78 Employer has discretion to decide on the percentage No requirement that repayment agreement be in writing if undisputed Of course ask your lawyer about that one Reflects that W/H views overpayments as wage advances Policies in WRITING! 39

FLSA Field Operations Handbook (FOH) 79 Section 30c10 Voluntary assignment of wages, loans, and advances: (b) While loans and cash advances are not facilities the principal may be deducted from the employee s wages even where such a deduction cuts into MW or OT due under FLSA. Exempt Employees 80 Recouping loan or advances on wages does not affect status as an exempt employee and does not violate salary basis requirement 40

Overpayments: The States 81 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 82 Advanced Vacation Pay The employee knows the vacation hours were advanced so we can take them back when the employee quits can t we? 41

Deducting for Advanced Vacation 83 Federal: If an employee is paid vacation before it is earned it is an advance on wages if the employee terminations We follow the same rules for advance on wages and overpayments 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! Vacation Pay In FOH 84 (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 42

New York 85 Per Section 193: Access at http://www.labor.ny.gov/formsdocs/wp/ls605.pdf 86 Loans and Employee Purchases 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 43

Loans to Employees 87 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 88 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 44

Employee Purchases 89 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 90 Anti-Wage Theft Laws What is new on the horizon for this latest wave 45

Anti-Wage Theft Laws 91 Federal: nothing on the federal NY: don t even try to deduct anything CA: already had anti-deducting laws so this is just a reinforcement mostly for upfront information HI: info up front NJ: info up front as well as limiting deductions TN: must not be passed on lower level than state Large national movement to pass in all states and small localities such as cities Are There Any Questions? 46