Garnishment of wages can be one of the most intimidating aspects of self-employment for new entrepreneurs. Sure, you’ve heard stories about contractors and gig workers getting paid late or getting underpaid for their work. But the prospect of having your wages garnished can be particularly scary, especially if you’re living hand-to-mouth from week to week.
Fortunately, wage garnishment can be avoided, provided you actively manage your finances while staying on top of developments related to taxes and other liabilities that could potentially lead to wage garnishment. To help you do just that, this article will provide an in-depth look at wage garnishment and its implications for self-employed workers. We’ll cover what wage garnishment is and how it affects self-employed workers, as well as tips and strategies for avoiding wage garnishment and understanding debt collection laws that protect self-employed workers from wage garnishment.
What Is wage Garnishment?
Before jumping into the specifics of wage garnishment, it’s important to understand exactly what wage garnishment is and how it works.
Simplistically, wage garnishment is a process where a court orders a third party (most commonly an employer, but it could also be someone else) to deduct a certain portion of a person’s wages and pay it to a creditor as payment for a debt. This is known as “salary attachment”.
The big difference between wage garnishment and other methods of debt collection (such as voluntary payments or legal action), is that wage garnishment is involuntary; the debtor has no say in the matter and is legally obligated to remit the specified portion of their wages to the creditor or debt collector.
Wage Garnishment and Self-Employment
When it comes to self-employment, wage garnishment is a little more complicated than it is for people who are not self-employed. That’s because when you’re self-employed, you don’t have an employer who can garnish your wages (unless you’re an independent contractor for someone else).
This means that, in some cases, debtors have to use their own funds to pay the garnishment. For example, if a debtor is using a savings account to pay themselves their wages, a debt collector may be able to garnish that account to cover the payment.
Additionally, debt collectors may also attempt to garnish other kinds of income that are ancillary to self-employment, such as royalties, rental income, bonuses, commissions, and other business income earned by the debtor.
For instance, some debt collectors may attempt to garnish any money received from a settlement, or money received from selling assets such as a car, house, or stock. While these kinds of assets are technically off-limits as far as wage garnishment is concerned, a debtor may have to seek legal recourse if the debt collector attempts to garnish these assets.
Rules for Wage Garnishment
To properly understand wage garnishment, it’s important to understand the rules in place to protect both the creditor and the debtor.
First and foremost, it’s important to understand that only certain kinds of debts are eligible for garnishment through the court system. Generally speaking, these include child support, alimony, unpaid taxes, student loans, and certain types of consumer debt.
The rule of thumb for debt collectors and creditors looking to garnish wages is that they must take a few steps before they can garnish your wages. These steps include filing a lawsuit, formally notifying the debtor of the pending lawsuit, and having the court order a garnishment of the debtor’s wages.
Additionally, debt collectors and creditors must abide by the restrictions set out in the law. Usually this means that they cannot garnish more than 25 percent of the debtor’s wages, or more than 30 times the federal minimum wage, whichever is lesser.
Additionally, debt collectors and creditors cannot garnish wages in excess of what a debtor can reasonably pay. What’s more, creditors and debt collectors must consider a debtor’s financial obligations, including food, rent, health insurance, and other necessary expenses.
Tax Obligations
Taxes are an essential aspect of self-employment. As a self-employed persons, you are responsible for both the collection and payment of your own taxes. This means that you are ultimately responsible for any tax liabilities that may have been incurred during the year, and for making sure, on your own, that you pay them in a timely manner.
If taxes are not paid, however, the Internal Revenue Service (IRS) may seek legal recourse to collect the debt, which could include wage garnishment. Because the IRS holds a superior position in the court system, the IRS may be able to garnish wages without having to take the steps outlined above.
The IRS generally takes a pragmatic approach to collection and will typically not garnish wages if the taxpayer is making an effort to settle their tax debt through other means, such as an installment agreement.
Final Thought
Most people would rather not have to worry about wage garnishment, especially when it comes to being self-employed. Knowing the specific rules and regulations regarding wage garnishment is a helpful way to protect yourself from this type of debt collection. As a self-employed individual, it’s important to keep track of all of your financial obligations, including taxes, to avoid any potential wage garnishment.
Additionally, understanding the laws that protect debtors can provide a great peace of mind when it comes to ensuring that you are managing your debt in the right way. If a debt collector is attempting to garnish your wages, taking the time to understand the legal implications and options available to you can help you protect yourself while working to pay off your debts in a responsible way.
