Businesses that pursue garnishment of wages are not given unlimited control of your earnings. They are bound by certain rules determined by the state government in your state of residence, including IRS Section 125. Your employer is regulated under the federal Consumer Credit Protection Act (CCPA) too, so states also follow those rules. States' rules can vary from the federal rules, but some basics are consistent: limited garnishment amount, pretax deductions and protection eligibility.
Limited Garnish Amounts
Creditors seeking to receive large garnishment amount percentages find they are limited in obtaining more than the maximum of 25 percent of disposable income allowed by the federal garnishment rules in Title III of the CCPA. But some states, which elect to implement their own garnishment amount maximums--as they can, provide creditors less of a disposable income percentage than the federal government's ratio.
States such as Massachusetts, limit garnishment amounts to a flat fee ($125) per week. Other states, such as New Jersey, prohibit garnishment altogether if wages are $154.50 or less per week. And, North Carolina only allows wage garnishment under three conditions: ambulance fees, child support or taxes. These limited garnishment amounts are then legally deducted from your paycheck based upon the state section rules, also known as IRS Section 125.
Lesser Amount Prevails
Once a wage garnishment has been approved legally, your employer will follow your specific state section to determine if the state law or the federal law will apply in your case. For example, if your state is like Massachusetts, with a flat rate of $125 maximum that can be garnished by an employer per pay check, but the federal government would approve 25 percent of your $600 weekly paycheck ($150.) for garnishment, the lesser (the state's flat rate) will prevail and be used for garnishment purposes. That lesser amount will then be recorded for payroll purposes under the IRS Section 125 known commonly as the "cafeteria plan." The cafeteria plan was originally implemented to offer states a financial incentive to encourage employees to choose to withhold monies for expected medical and other anticipated expenses, giving the employee and the employer a cost break from paying taxes due to advanced planning. In regard to wage garnishment, this plan provides an incentive to the employer by eliminating their burden of calculating or reporting tax on the garnished wages.
The Section 125 plan dictates that this wage garnishment amount will not be taxed by the state or federal government. Instead, your employer will post this amount under the "before tax" category known as IRS Section 125 on your paycheck stub. This allows them to deduct it before computing your paycheck earnings taxes. This rule helps the employer, as he doesn't have to compute the tax on the garnishment wages, per the IRS Section 125 rule, also known as voluntary payroll deductions or the state Section 125.