When you think of wage garnishment, you think of someone who is financially irresponsible and has not properly taken care of their financial debts. There’s no way this could happen to a hardworking, financially conscious business owner, right? Wrong! Take a journey with us for a moment. Let’s say you are a small business owner. You diligently keep up with your finances and file your taxes every year.
The ability to be frugal and do as many things yourself is the key to saving money and making your business successful, so you do your own taxes every year. You rejoice in years you receive a refund, and dutifully pay on years you owe taxes.
However, unbeknownst to you is that you actually owe more than what you came up with when filing your taxes. You’ve done everything right. You’ve filed your taxes on time, paid the amount you owed, and moved on with the million other things that need your attention when running a business. That is until you receive a notice of garnishment by the IRS. What now?
It is important to understand garnishment and your rights! Let’s take a closer look.
What Does Garnishment Mean?
It is very likely that you have heard of garnishment in order to pay off an outstanding debt. Simply put, the process of garnishing is a way in which creditors can legally retrieve the money owed them through wages, bank accounts, or assets. In most cases with the exception of child support, tax debt, and student loans a court order is required before garnishment can take place. In every case, you must be legally notified beforehand.
There are two types of garnishments you are subject to. The method creditors use is dependent on your employment situation.
What Are the Two Different Types of Garnishments?
There are two types of garnishments you may be subject to in order to pay off a debt. The first is wage garnishment, which is a situation in which the employer takes out a certain amount of your paycheck before it reaches your bank account and sends it to your creditor. With this type of garnishment, the required amount of money is collected before it ever reaches your bank account. Wage garnishment stays in effect until either the debt is paid off in full or different arrangements are made with the creditor.
The second type of garnishment is non-wage garnishment. This type of garnishment utilizes methods other than wages to settle debts. This method is commonly used when a person is self-employed. Bank accounts and rentals are two of the most common ways of settling debts through non-wage garnishment. As a self-employed small business owner, non-wage garnishment is the most likely method by which the IRS will garnish your wages.
How Can Garnishment Happen to You?
Garnishment is a last resort for creditors to collect the money owed to them. Garnishing happens when either you are unable to make regular payments or completely ignore the debt. This leaves your account in default. Garnishment most commonly happens when a creditor decides to sue you in court for the amount of money you owe. If the court rules in favor of the creditor, the court will issue a notice to your employer as to when the garnishment of wages will begin.
In situations where a court order is not required to garnish wages, official notice must still be issued before garnishing can begin. The IRS does not require a court order to garnish wages. If the creditor chooses non-wage garnishment a creditor may access commissions, earnings from rentals, or even access your bank account in order to settle the debt.
How Much Can Be Garnished?
The good news is there are federal and state limits as to how much can be taken from your check in order to pay off your creditors. The percentage of your wage that can be garnished depends on the type of debt. The courts are not allowed to leave you in a financial situation in which you are unable to pay your bills or meet your basic necessities. For this reason, the percentage of wages garnished is based on your disposable income.
If you are subject to wage garnishment for defaulting on student loans, the creditor can garnish up to 15 percent of your disposable income. The debtor does not have to sue you in order to collect payment. However, they must provide you with an official written notice of wage garnishment.
When it comes to child support and alimony, up to 50 percent of your disposable income can be garnished if you have someone else such as another child or a spouse that depends on you for support. Otherwise, up to 60 percent of your disposable income can be garnished.
When it comes to tax debts, the amount garnished depends on your individual situation. The IRS takes into consideration how many dependents you have as well as your standard deduction amount. Each state has its own formula for how much can be garnished.
For non-wage garnishment, up to one-hundred percent of commissions are subject to garnishment as well as income from rental properties, and bank accounts.
What Can You Do About an IRS Garnishment?
It may seem as if you are helpless when it comes to being subject to garnishment. This is not the case. You do have certain rights when it comes to the process. As soon as you receive notice of tax garnishment, you should contact the IRS immediately to work out an agreement other than garnishment.
The IRS understands the struggles of small businesses and the difficulty in paying large amounts in one lump sum. In most cases, they will set up a reasonable payment plan with your business. These installments will come with interest rates, but they will prevent the IRS from seizing income from rental property, commissions, or accessing your bank account.
If your business is experiencing a particularly difficult time, the IRS may see fit to place your business in uncollectible status. Your business’s debts are still there and you still need to find a way to settle the debt, but the IRS will not go after any of your properties in order to settle the debt.
Lean On a Trusted Expert to Protect Your Business’s Finances
Once notified, you will have limited time to take action before your financial situation becomes much worse. Often times, you only have days to react. Consider reaching out to a trusted professional who understands the time sensitivity and complexity of the situation and can help you make the best decisions for the financial health of both your family and your business.