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What is a Wage Garnishment?  

What is a Wage Garnishment?  

Wage garnishments are court orders that require your employer to withhold a portion of your paychecks and send that money directly to the creditor named on the court order, until the debt has been paid off. Your wages can be garnished for unpaid child support, student loans, and consumer debt like credit cards. You can also face wage garnishment for having unpaid tax debt, which like child support, does not require a court order in order for garnishment to take place.

Wage garnishment is often confused with non-wage garnishment or bank levy, which is when creditors, as well as the IRS, can seize the contents of your bank account and other assets, such as retirement accounts or even your home. The levy process has different steps involved and if your chief sources of income come from other sources such as self-employment, rental real estate, or pensions, then the regulations for wage garnishment don't come into effect.

Why Would I Face Wage Garnishment?

For most types of debt, like student loans and consumer debt, wage garnishment doesn't happen overnight. You would have to have been delinquent on your payments for an incredibly long time before debt collectors eventually get court orders to garnish your wages until your obligations have been repaid or a settlement is approached. There are federal limits on how much creditors are allowed to take out of your wages for different types of debt.

For tax debt, the IRS and state tax department regulations are what determines the due process for fighting wage garnishment and mediating your options to deal with your unpaid tax bills. Generally, the IRS can't garnish more than 15% of your paychecks and exceptions are made based on the number of dependents you have and other special circumstances. For state taxes, depending on the state that you live in, you may be offered additional protections from tax bill related wage garnishment such as being a primary caregiver or low income.

You also would have to have been delinquent on paying your tax bills for a very long time before garnishment takes place and not have contacted the IRS or state tax authority regarding your options.

How Would Unpaid Tax Bills Lead to Wage Garnishment?

If you owe taxes and didn't take any actions to mitigate your tax bill and discuss your payment or settlement options, the IRS must follow a due process before it starts cutting into your paychecks. Your state may or may not have due process, but generally they will give you time and options for payment, but you must contact them.

First, they will send you a written notice about the taxes you owe. But if you ignore the bill and don't make any payments or take action otherwise, the lien process can commence.

Tax liens can often result in wage garnishment in order to satisfy tax debt. It ultimately depends on your overall financial situation as well as the amount of taxes owed. The major difference between a tax lien and a tax levy is that the lien simply gives the IRS or state tax authority priority over other creditors and the ability to garnish your wages, while a tax levy is the actual seizure of your property, such as your bank account.

Can I Stop Wage Garnishment Before It Happens?

Yes. If you can't afford to pay your tax bill, there are various options for payment plans if you can't borrow from friends and family or get a personal loan. You can also ask the IRS to make your account temporarily uncollectible while you figure out how to make payments.

Jon Orborn, EA, writes for TaxBuzz, a tax news and advice website. Reach him at [email protected].

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Steward Financial

Steward Financial

Jon Osborn is a tax preparer based in San Dimas, California. His company, Steward Financial Services, offers a broad range of tax preparation, accounting and business consulting for small businesses. He loves to work with clients who are looking for answers to complex tax and business planning issues. He has owned several small businesses and worked with over one hundred small business owners. He helps his individual and business tax clients find the best ways to spend their money in order to minimize IRS tax. Small businesses looking to grow, sell or just increase cash flow are one of Jon's specialties.

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