Payroll Deductions: What Can and Can t Deduct From Employee Pay Presented Wednesday, August 16, 2017

Payroll Deductions: What Can and Can t Deduct From Employee Pay Presented Wednesday, August 16, 2017 1

2016 The Payroll Advisor 2

Housekeeping 3 Credit Questions Today s topic Speaker 2016 The Payroll Advisor

To earn RCH credit you must 4 Stay on the webinar, online for the full 60 minutes Be watching using your unique URL Certificates delivered by email, to registered email, by September 15th 2016 The Payroll Advisor

Our Focus For Today 5 Taxes Child Support Tax levies Creditor Garnishments Voluntary Wage Assignments Uniforms Meals/Lodging Shortages/Breakage Overpayments Advanced Vacation Pay Loans to employees Employee purchases

About the Speaker 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. 6

Types of Deductions 7 Voluntary Employee asks you to deduct health insurance deduction for example Involuntary someone other than employee orders you to deduct taxes for example

8 Taxes Which are mandatory, which are a courtesy, and which ones the employee controls

Federal Income Tax 9 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

10 Federal Insurance Contributions Act (FICA Taxes) Social Security (OASDI) Established in the 1930 s Current rate is 6.2% 2017 Wage base is $127,200 Maximum to withhold for 2016 is $7,886.40 Employer matches dollar for dollar at 6.2% for 2017 Must be taken for all subject wages Medicare 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 11 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 12 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 13 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 14 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 15 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

16 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

17 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

18 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

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20 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

21 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

Garnishments and the CCPA 22 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

Limits on Child Support 23 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 24 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 25 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 26 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 27 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

28 Check the chart Creditor Garnishment Calculation 30 times federal minimum wage

Creditor Garnishment Limits by State 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 AK TX LA FL 29 HI States following federal rules State rules mirror federal 25% of disposable or amounts in excess of 40 times state/fed min wage 25% disposable or amounts exceeding 35 times state/fed min wage 25% disposable or amounts exceeding 50 times state/fed min wage Follows federal rules with limits for head of household Unique state rules

States With Unique State Rules 30 AL: 25% of resident s wages CA: 25% of disposable or 50% amount exceed 40 times state or local minimum wage DE: 15% of total wages IL: 15% of gross wages or amount over 45 times state min wage MA: 85% or amount of 50 times fed/state min wage is exempt NC: Follows federal except orders from public hospitals and public assistance are limited NV: Weekly gross <$770 exempt amount 82% or 50 times fed min wage. >$770 75% is exempt eff.10-1- 17 PA: 10% for debts to landlords, taxes to municipalities or HEAAA debt SC: Garnishments not allowed for consumer debts SD: lessor of 20% of weekly disposable or amount over $346 less $25 for each depending living with employee TX: Current wages exempt from garnishment WI: 20% of disposable unless household income below fed poverty level then exempt WV: 20% of disposable or amount over 50 times fed min wage

Creditor Garnishment Fees by State 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 AK TX LA FL HI No provisions for fees Permit fees 31 Have unique fees for certain items

State Fees 32 State Arizona Arkansas California District of Columbia $5 each pay period from nonexempt earnings $2.50 per pay period $1.00 for each payment $2.00 for withholding order Fees Permitted Florida Georgia Illinois Indiana $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 Kansas $10 per pay period up to $20 per month, payable by creditor if can t be taken from employee Louisiana $3 from nonexempt income each payment garnishment is in effect Maine $1 per check to be taken from amount withheld Michigan $6 fee paid by plaintiff at the time a writ of garnishment is served. Amount is $35 for writs issued after 9-30-15 Minnesota $15 paid by creditor to employer at time of service of garnishment Missouri One time fee not to exceed $20 withheld from wages in addition to garnishment 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 North Dakota Oklahoma Ohio Oregon 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 $3 per pay period payable by employee $1 for property garnishment payable by creditor $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 Vermont $10 for district court cases, $50 for superior court cases payable by creditor Virginia $10 for each garnishment summons served Washington $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

State Fees 33 May also be a fee to collect for the state or court or plaintiff in the case Read the garnishment

What if there is more than one? 34 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 35 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)

Voluntary Wage Assignment 36 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

37 Uniforms When the employer pays for it and when the employee furnishes it

Deducting for Uniforms 38 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 39 States that DO NOT permit include: IA, IN, KS, ME, NH, NJ, NV, OR, RI States that require written authorization include: AK, AZ, CO, CT, DE, HI, ID, IL, KY, MD, MI, NC, ND, NM, OH, OK, PA, TN, TX, UT, VA, VT, WA, WV, & WY 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 MN: up to $50 and must be returned if employee terminates

40 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

41 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 primarily for the benefit of the employer Employee must accept voluntarily Lodging must be employee s residence on a permanent basis

Lodging 42 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 43 On your business premises generally means the employee s place of work

For Employer s Convenience 44 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 45 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

Example 46 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 47 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

De Minimis Meals 48 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 49 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

Meals on Premises 50 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 51 If more than half of employees are furnished meals for employer convenience may treat all meals as for convenience of employer

Meals and Lodging Credits Against Minimum Wage 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 AK TX LA FL HI Do not permit No minimum wage No provisions Sets monetary limit Reasonable cost of meals and lodging Varies, for certain employees only 52

State AR CA CO CT ID IL Up to 30 per hour Furnishes exact amounts on minimum wage poster Requirements Lodging may not exceed $25 per week; meals must be reasonable costs no profit to employer must be taken before deduction is made Up to 85 for a full meal; 45 for a light meal Meals: $3 a meal/$60 a week; Lodging:$4.50 a day/$30 a week; $90 a week for meals and lodging Applies to seasonal camp counselors who reside on premises MA MN MT ND NH NJ NM NV NY OK SD Meals: B-$1; L-$1.75; D-$1.75 Lodging: $30/week solo; $25/week 2 employees; $20/week 3 or more employees Applies to hotels, motels, lodges and resorts Up to 40% for lodging, not permitted for meals Up to $18 a day Full room/board: $45/week or $6.45/day Meals: $39.45/week or $1.88/meal Lodging: $10.88/week or $1.80/day Full room/board: $219.40/week; $94 for lodging only/week; $25.10/meals (3 per day) B/L:$7.50; D-$10 Agricultural employees: reasonable costs Meals: $1.50/day; B-35 ; L-45 ; D-70 Based on wage order Cannot exceed 50% of minimum wage Cannot exceed 50% of minimum wage VT Full room and board: $86.47/week; Full room: $25.03/week; Full board: $71.54/week; Nightly lodging: $4.17; B-$3.03; L- $3.41; D-$3.78 WI Lodging: $58/week or $8.30/day non-opportunity/agricultural employees Opportunity employees:$47.20/week or $6.75/day 53

54 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

Deducting for Breakage or Shortages 55 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

Are deductions permitted for breakages? 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 AK TX LA FL HI NO Yes with employee written authorization required YES Yes if due to willful, dishonest act, theft or court proceeding 56

Are deductions permitted for shortages? 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 AK TX LA FL HI NO Yes with employee written authorization required 57 YES Yes if due to willful, dishonest act, theft or court proceeding Yes if employee has sole control over cash drawer

58 Overpayments The employee was overpaid so you can just take the money back or can you?

Overpayments: FLSA Requirements 59 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 or overtime

FLSA 60 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 61 Every state will vary: states with no provisions include: AL, CT, DE, FL, GA, IA, ID, LA, MA, MD, MO, MS, MT, NM, OH, RI, SC, SD, TN, UT, VA, WV &WY 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 unless you are really sure IN you are a creditor at 25% KY no limit but employee must receive min wage for each hour worked Me no more than 10% of net unless employee agrees MI you follow all other current deductions; only 15% of gross for pay period NH no more than 20% of gross pay per pay period PA cannot go below minimum wage WA only 90 days from initial overpayment to detect and implement plan

62 Advanced Vacation Pay 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 63 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 64 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! New York Example

65 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 and Employee Purchases

Loans to Employees 66 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 67 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 68 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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