Involuntary deductions are withholdings from an employee’s paycheck for things such as child support, wage garnishments, back taxes, and unpaid student loans. In many cases, these are legally mandated deductions that are beyond an employee’s control.
Key takeaways about involuntary deductions
- Involuntary deductions are typically paycheck deductions that are legally mandated to cover an employee’s child support, unpaid taxes or student loans, alimony, or bankruptcy.
- Both federal and state laws govern involuntary paycheck deductions.
- Employers maintain responsibility for accurately managing these deductions.
Unlike voluntary deductions for perks such as health insurance, dental insurance, and 401(k) contributions, involuntary deductions do not have an employee opt-out option. Most involuntary payroll deductions are a result of a court order, and your company will need to manage them as smoothly as every other paycheck deduction.
Involuntary payroll deductions create administrative red tape for businesses of all sizes. Fortunately, a little knowledge and organization can go a long way towards setting your company up for success in this task.
Types of involuntary deductions
If someone in your company is facing an involuntary deduction, it pays to understand how these differ from typical payroll tax deductions. This allows your organization to put processes in place to handle these specific paycheck deductions.
So what are common involuntary deductions you’re likely to encounter? Here are the four key types employees typically come across.
Payroll tax withholdings
Payroll taxes can be withheld from an employee’s paycheck if they owe back taxes. This can include federal taxes, state taxes, FICA taxes for Social Security and Medicare, and local taxes.
Wage garnishments
Wage garnishments can be used to pay off a debt such as child support, alimony, or student loans.
Child support obligations
Employees who owe back child support can have an involuntary deduction from their paychecks for outstanding money that’s due.
Bankruptcy orders
Finally, involuntary payroll deductions can be used to pay off bankruptcy orders.
The takeaway is that involuntary deductions come in different forms and ALL can be garnished from a worker’s paycheck by a court order. Next, we spoke with financial writer and certified public accountant (CPA) David Kindness to learn more about why these involuntary deductions exist.
Why are involuntary deductions required?
As the name indicates, involuntary deductions are just that – involuntary. The employee can’t opt out. Involuntary deductions are required in large part due to some type of debt or financial obligation that the employee is required to pay, but has neglected. These typically include unpaid taxes, overdue loan balances, neglected child support payments, or unpaid alimony.
— David Kindness, CPA and OnPay subject matter expert
But why is the employee required to make these payments? Who is requiring it? The answer to this question depends on the specific situation surrounding the employee’s debt. “If they didn’t pay their taxes, then the involuntary deduction is likely required by the IRS,” explains David. “In this scenario, you as the employer will have to withhold your employee’s wages to make payments on the tax debt, just like any other withholding.”
If the unpaid debt relates to an outstanding loan balance, unpaid child support, or neglected alimony payments, then it’s likely that a court order – signed by a judge – is what will necessitate the involuntary deduction. Once more we asked David for his two cents.
“This situation occurs due to a dispute between your employee and the affected party, whether that’s a creditor or their ex-spouse or significant other. Again, you’ll have to reduce your employee’s wages to make the required payments.
— David Kindness, CPA and OnPay contributor
You may be familiar with the term ‘wage garnishment’, which we mentioned above. Wage garnishments and involuntary deductions are different terms for the same thing. Both occur when a legal obligation arises that forces the employer to “garnish”, or reduce, the employee’s wages to pay off a debt.”
In any case, employers who fail to make required deductions or garnishments could face legal trouble with the courts or the IRS, so it’s important to play ball. A good payroll software, like OnPay, can help ensure that these deductions are smooth and stress-free.
What is the difference between voluntary and involuntary deductions?
Now that we understand what involuntary deductions are, let’s explore how they differ from voluntary deductions. The biggest difference is that an employee generally has no control over their involuntary deductions. They typically cannot change them or opt out of them, at least not without going through the court system to do so.
Voluntary deductions, on the other hand, can generally be chosen, changed, opted into, or opted out of, by the employee. The employee generally is not obligated to take part in voluntary deductions, although it may be in their best interest to do so. Let’s take a look at some common voluntary deductions:
- Health insurance plans: Many employers offer voluntary health insurance plans, which typically come with a monthly fee that is deducted from the employee’s paycheck. Most employees will find employer-provided plans less expensive than other options.
- Retirement plans: Many employers offer retirement plans, such as 401(k)s, 403(b)s, or SIMPLE IRAs. Often, employers will match contributions to these plans up to a certain percent (usually 3%).
- Life insurance: Employers may offer life insurance plans to employees, often at lower fees than other options.
- Other voluntary deductions: Other voluntary deductions could include items like charitable contributions, costs for work provided meals, gyms, or parking, etc.
Voluntary deductions are exactly what they sound like – voluntary. Employers generally cannot compel the employee to take part in them (unless a state or local law requires it), and the employee can choose which deductions they take part in.
Similarly, there are generally no negative legal ramifications for opting out of a voluntary deduction. On the contrary, voluntary deductions can be a great way for employers to offer useful benefits to employees at a relatively low cost.
— David Kindness, CPA and OnPay subject matter expert
Next, let’s find out more about the laws that set involuntary deductions in motion.
The legal framework governing involuntary deductions
A series of federal, state, and local laws play into involuntary deductions on paychecks.
Federal laws
The Consumer Credit Protection Act (CCPA) limits the amount of an employee’s wages that can be garnished or involuntarily deducted.
Typically, weekly garnishments “may not exceed the lesser of two figures: 25% of the employee’s disposable earnings, or the amount by which an employee’s disposable earnings are greater than 30 times the federal minimum wage (currently $7.25 an hour).”
For example, if someone makes less than $217.50 per week in disposable earnings ($7.25 x 30 hours), wage garnishment is not permitted. If their disposable earnings exceed $217.50 but are less than $290 ($7.25 x 40 hours), then the funds above $217.50 can be involuntarily deducted. When a worker’s earnings surpass $290 per week, up to 25% of those earnings can be garnished. Regardless, 25% is the maximum that can be deducted from a given paycheck.
Keep this in mind
“Disposable income” refers to the total amount that the employee earns after legally required deductions have been removed. These deductions typically include things like federal, state, and local taxes, FICA taxes (Social Security and Medicare), and any applicable state unemployment taxes.
State laws
Many states also have their own laws that relate to wage garnishments and involuntary deductions. In Alaska, for instance, the maximum that can be garnished is $473 per week or $743 for sole earners living and working in the state. In Hawaii, 5% of the employee’s first $100 of disposable income can be garnished per month, 10% of the next $100, as well as 20% of funds in excess of $200 per month.
In some states, such as North Carolina, wage garnishment for consumer debt is not allowed. And in South Carolina and Texas, wage garnishments are limited to tax-related debts, federal student loans, child support, and court-ordered fines.
Note that you may be faced with specific state statutes that govern payroll deductions based on where you do business.
Local regulations
Employers in any city or community are required to follow state and federal laws when it comes to wage garnishment, and even local back taxes can be part of an employee’s involuntary deductions.
Employer responsibilities
Naturally, employers face a series of responsibilities when managing involuntary deductions for employees, such as:
- Accurate calculations: Employers are required to calculate and then deduct accurate funds from each paycheck as required by law. You are also responsible for calculating and deducting wages in accordance with the order of law, where some deductions will take higher precedence than others.
- Timely remittance of deductions: In turn, employers must pay the employee’s creditors in a timely manner, which is defined as within 15 days of the close of the pay period.
- Clear communication with employees: Involuntary deductions are often a touchy subject for many employees, and clear communication can prevent surprises and disagreements.
Before any wage garnishment begins, it is a good idea to let employees know how much you will be deducting, how long this will take place, and why this is happening. Employers are also required to inform employees of the amount deducted each pay period and the method used to calculate that specific figure. The more you can standardize and automate this communication and this process, the better.
Finally, you are required to let the court know if that employee is fired or quits coming to work. However, you cannot fire an employee for one wage garnishment within one calendar year.
What do involuntary deductions look like in practice?
In practice, examples of involuntary deductions typically start with child support taking precedence over other issues. After that, federal tax levies are often the next priority. Additionally, some involuntary deductions are very short-term, while others can take place over many years.
Common challenges in managing involuntary deductions
While there are ways to mitigate all of these complications in the first place, it’s good to know the potential roadblocks so you can manage your time. They can include the following:
- Multiple deductions: Some employees will have more than one court order requiring wage garnishment, in which case you will need to meticulously prioritize these orders based on the latest legal regulations.
- Accurate calculations: Deductions are based on each employee’s disposable earnings (that is, their pay after tax deductions), and it is critical to accurately calculate proper deduction amounts to avoid fines and blowback. Likewise, if an employee’s pay or salary changes, the deduction amount may need to be adjusted accordingly.
- Ongoing legal compliance: Like it or not, your company is required to stay on top of new federal and state laws as well as the priority list of garnishments. Ideally, your company will have an employee dedicated to this task.
- Data integrity: You will also be required to maintain good records of all court orders and payments for each employee undergoing involuntary deductions. These records may need to be provided to satisfy court orders over time.
- Communication, communication, communication: Obviously, this can create a tough situation for employees who may feel angry or ashamed about their involuntary deductions. Make clear and regular communication a priority so that they understand what is happening, when, and why.
Other possible challenges revolve around employee privacy issues and the need to collaborate with third parties involved in deductions. Preparing for these challenges ahead of time can prevent issues when wages are taken out of a paycheck.
Bottom line: Understanding involuntary deductions makes good business sense
While involuntary deductions can be an unfortunate development when building a team, many companies can help you manage involuntary deductions, as well as other types of payroll deductions, without headaches. Almost all small business payroll software can help your business automate involuntary and voluntary deductions, manage both pre-tax deductions and post-tax deductions, and pay your team – all in a couple of clicks. Explore OnPay today to simplify and streamline all of your company’s payroll needs.
Take a tour to see how easy payroll can be.
Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.