paychecks

Are You Withholding the Right Amount of Taxes from Your Paycheck?

Damian Davila — Tue, 03 Apr 2018 08:30:14 +0000

In 2017, the IRS received 152,235,000 tax returns — and of those returns, more than 73 percent were granted a refund. With the average refund last year standing at $2,895, you might think getting a windfall in the spring is a good thing. But rather than giving the government an interest-free loan all year, wouldn't you have preferred to have an extra $241.25 per month in your paycheck?

On the other hand, the 27 percent of taxpayers not receiving a refund may be getting the opposite — a big tax bill. They may not be having enough money withheld from their paychecks for taxes.

This is why it's important to withhold the right amount of taxes out of your paycheck. Let's review how to cover your projected tax liability while minimizing your refund. (See also: Bigger Paycheck or Bigger Tax Refund — Which Should You Pick?)

Meet the IRS Withholding Calculator

With the passing of the Tax Cuts and Jobs Act, many Americans are still trying to figure out the full effects of this legislation on their paychecks. In an effort to help taxpayers make sense of recent changes to the tax law, the IRS updated its Withholding Calculator on February 28, 2018.

While the IRS recommends that all taxpayers take a second look at how much in taxes they're taking out of their paychecks, the agency highly encourages the following groups to check their withholdings for 2018:

Two-income families.
People with two or more jobs at the same time or who only work for part of the year.
People with children who claim credits such as the Child Tax Credit.
People who itemized deductions in 2017.
People with high incomes and more complex tax returns.

How to use the IRS Withholding Calculator

Here's your game plan to achieve a "Goldilocks" withholding rate on your paycheck this year.

1. Gather your latest pay stub(s) and latest tax return

If you don't receive a pay stub in the mail, contact your human resources office to get a copy or learn how you can download one online from your company portal. Depending on your unique financial situation, you may also want to find your 2016 return (or your 2017, if you've completed it) to more accurately estimate your 2018 income, budget, expenses, and list of tax credits.

2. Provide general information and list potential tax credits

In the first two sections of the IRS Withholding Calculator, indicate your filing status, whether or not anybody can claim you as a dependent, how many jobs you and your spouse (if applicable) have, how many dependents you will claim on your return, and whether or not you or your spouse will be 65 or older on January 1, 2019.

Additionally, you will need to list any applicable tax credits, such as the Child Tax Credit and Earned Income Tax Credit. This is why it's helpful to have past returns handy to help you estimate those credits. (See also: 8 Tax Return Mistakes Even Smart People Make)

3. Detail your wage income and withholding

Next, enter your gross wages, salaries, tips, and any bonuses you expect to receive in 2018. Using your most recent pay stubs, enter the total federal income tax withheld to date in 2018 and the federal income tax withheld from your last salary payment. Indicate how frequently you receive your paychecks, and, if applicable, when you started this job in 2018, and when you expect this job to end in 2018.

If you receive any other taxable income, make sure to include it as well. The IRS Withholding Calculator is only as accurate as the information you enter, so leaving that income out may result in a higher tax liability.

4. List deductions

Here is one of the biggest changes implemented by the Tax Cuts and Jobs Act. If your standard deduction ($12,000 for individuals, $18,000 for heads of household, and $24,000 for married filing jointly) is more than your total itemized deductions, your standard deduction will be used to calculate your withholding. Otherwise, your total itemized deduction amount will be used. So, this is why it still pays to keep track of all of those deductions throughout the year.

Use your latest return to estimate your 2018 itemized deductions, including medical and dental expenses, paid taxes (up to $5,000 for single filers and $10,000 for married filers for applicable state and local income taxes, property taxes, or sales taxes), gifts to charity, and other itemized deductions. Remember that beginning in 2018, job and certain miscellaneous expenses are no longer deductible. (See also: 12 Things You Should Know About the New Tax Law)

5. Adjust your W4

Once you have entered all the data, the IRS Withholding Calculator will provide you with clear instructions on how to update your W4 with your employer. Depending on your situation, some action items may include changing your filing status, adjusting your number of allowances, and withholding an extra amount every paycheck.

Following the instructions from the calculator, you'll cover your tax liability just right.

Revisit the IRS Withholding Calculator as necessary

Don't set it and forget it. If your job (Promotion? Salary bump? Side gig?) or life situation (Married? Baby?) changes, revisit the IRS Withholding Calculator. The calculator will help you make sure you have the right amount of tax withheld from your paycheck at work.

The IRS recommends submitting your updated W4 to your employer as soon as possible. Withholding takes place throughout the year, so it's better to take this step right away.

Like this article? Pin it!

This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Here's What to Do If Your Wages Are Garnished

Denise Hill — Tue, 27 Feb 2018 09:00:08 +0000

The concept of wage garnishment is frightening. And while having your wages taken to pay off a creditor is considered an extreme "last resort" to collect on a debt, it is more common than you may think.

A 2013 report by ADP Research Institute found that approximately 7 percent of the 13 million employees assessed in their survey had experienced wage garnishment that year, the majority of which were workers aged 35 to 44. The most common reasons for this drastic form of collection were unpaid taxes, child support, consumer debts, and student loans.

If you have fallen behind repaying what you owe, and creditors are threatening to or have already garnished your wages, here are the things you should do. (See also: Be Careful Who You Owe: Here's Who Can Garnish Your Wages)

Understand what wage garnishment means

First, it is important to understand what wage garnishment is and how it works. In a wage garnishment, creditors have sued and won a judgment against you. A court issues an order requiring your employer to withhold a portion of your paycheck. This is done until your debt is paid in full. Different garnishment rules apply to different types of debt and each state sets its own legal limits on how much of your paycheck can be garnished.

Nonwage garnishment, which is also known as a bank levy, is a legal action that allows creditors to tap directly into your bank account. Typically, the funds in your account are frozen, and the bank is ordered to remove the necessary funds to satisfy the debt.

Once a judgment is entered against you, the person or entity that won the lawsuit gains access to a portion of your wages by providing a copy of the court order to local law enforcement. Law enforcement sends the court order to your employer. Your employer must notify you of the garnishment and begin withholding part of your wages. Your employer is also responsible for ensuring the garnished funds are sent to your creditor. (See also: What Really Happens When You Don't Pay Your Student Loans)

Know your rights

If you have defaulted on a loan, stopped paying your credit card bill, or have incurred massive amounts of medical expenses, creditors can't just take money from your paycheck. There is a process that must be followed.

You have to be sued.
A judgment must be entered against you.
A court ordered wage garnishment must be issued.
You have to be notified of the court order (by your employer, and most times the creditor).
You have the right to appeal the decision.

It is also important to note that federal law places limits on how much creditors can take from your paycheck. The amount that can be garnished is capped at 25 percent of your net income or the amount by which your weekly wages exceed 30 times the minimum wage, whichever is the lowest. Some states set lower garnishment limits so it is important to know the laws that apply to your particular situation.

Know the exceptions to the rules

While the above rules govern most cases of wage garnishment, there are a few exceptions. For example, when it comes to child support, half your net earnings can be taken without a court order. If you don't have a spouse or other children whom you support, a whopping 60 percent can be taken. And an additional 5 percent can be tacked on if you are more than 12 weeks in arrears.

If you owe money to the IRS, tread carefully. It can take a big bite out of your wages, without a court order. The amount it can take depends on the number of dependents you have and your standard deductible amount. However, before snatching your money, the IRS must notify you of their intent first. They are required to send a wage levy notice to your employer, who is required to supply you with a copy. (See also: 10 Reasons You Should Really Fear an IRS Audit)

State and local tax agencies can also garnish your wages without a court order. Most states have laws limiting how much they can take. The information concerning the rules and limits is available at your state's department of labor.

The bottom line is unless you owe child support, back taxes, or student loans, your creditors cannot garnish your wages without going through the appropriate steps and obtaining a court order.

If possible, avoid the process altogether

When facing a situation where you know you can't pay a debt — of any kind, but especially child support — the best course of action is to be proactive. Contact your creditors (or petition family court) and try to reach a restructured payment arrangement.

If you don't show up to court or you lose your case, the creditor automatically wins a judgment against you to garnish your wages or bank account.

Try to settle the debt

If you know a creditor is considering taking legal action, see if you can settle the debt. This is especially effective with credit card companies. Often times, most creditors (including the IRS) are willing to accept a settlement — which is a partial payment of the total amount due — in lieu of going to court. This allows you to avoid a lawsuit, wage garnishment, and even more damage to your credit. (See also: 4 Ways to Negotiate Credit Card Debt)

Understand the court order

If a judgment is issued against you, carefully review the court documents. Make sure all the information is accurate. Creditors can make mistakes. Check to ensure the outstanding amount is correct and it's not something you've already paid. Also, examine the debt carefully to be sure that it is indeed your debt. We live in an era of security breaches and identity theft. It is important to ensure that you are not being sued for someone else's fraud.

It is also important to know that in some circumstances, some states provide protection for a portion of your wages — these are called exemptions. When you receive the garnishment notice, research the laws in your state and find out if and how much wage protection you are entitled. File a petition in state court requesting the exemption.

Challenge the judgment

When a judgment is issued against you, you have the right to appeal it. If you believe the judgment is flawed, is unreasonable, will cause undue financial harm, or is being improperly executed, you can contest the court's ruling. You will be notified of the ruling and of the process to appeal. Pay attention to rules governing the appeal and file immediately — in some cases, you may have as little as five business days to voice your objection. If you fail to show up in court, the creditor automatically wins a judgment against you.

Accept the judgment

Accepting the judgment isn't necessarily a bad thing. You are forced to face and remedy a situation that has probably caused you copious amounts of stress. You can simply allow your wages to be garnished and make your payments that way.

Don't file for bankruptcy or quit your job

Bankruptcy immediately stops garnishment proceedings, however it is ill-advisable to file just for this reason. Bankruptcy carries with it a litany of consequences and implications and shouldn't be considered lightly. Filing bankruptcy to avoid wage garnishment would be akin to extinguishing a match with a fire-hose. Always consult a professional before you take any drastic measure that can have detrimental and long-term consequences.

Quitting your job is equally ill-advisable. You're doing nothing but prolonging and complicating the process. If you fear retaliation from your employer, understand that under federal law, you cannot be fired if your wages are garnished to pay off one debt. These protections lessen, however, if more than one creditor has garnished your wages.

It's also important to note that becoming unemployed doesn't negate the judgment. The judgment will be enacted on the next job you get and is still part of your credit history. Continuously trying to skirt payment could result in the court taking more aggressive action which could include serving jail time.

Like this article? Pin it!

This article is from Denise Hill of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

6 Moves You Should Make Now for Your 2018 Taxes

Christa Avampato — Thu, 19 Oct 2017 08:00:07 +0000

Fall is full of wonderful things: pumpkin lattes, crisp autumn air, changing leaves, and tax preparation. OK, tax preparation may not hold the same wonder as fall flavors and vibrant foliage, but this is a critical time to get your financial house in order before the end of the year. In particular, here are six easy tax tasks to take care of before we enter 2018.

1. Re-evaluate your withholding

Did the size of your family change this year? If it did, contact your human resources department to update your withholding so that you aren't overpaying or underpaying your taxes throughout the year.

2. Compare your life situation this year versus last year

Get out your 2016 tax return and consider any changes that have happened in your life since you filed your taxes for that year. Did you move to a new county, city, or state? Did your marital status change, and you'll now be filing jointly? Did you switch jobs or take on some freelance work? All of these changes can impact your tax filing, particularly if you itemize your expenses.

For example, let's say you moved to a new city this year and now work full-time from home. You'll want to have any job search expenses, home office and work-related expenses, and any moving costs detailed and organized before you visit your accountant or start the preparation and filing process yourself. All of these costs are potentially deductible on your taxes if you have well-organized records of them.

If you moved this year, make sure your employer(s) (full-time and freelance) from 2017 have your updated address so that you get your W-2 forms without delay.

3. Max out your retirement contributions

Are you maxing out contributions to your 401(k), 403(b), and/or IRA accounts? If not, could you afford to increase your contributions to meet or get closer to the max for the year? You can contribute up to a maximum of $18,000 (plus an additional $6,000 if over age 50) to your 401(k) or 403(b) for 2017 until December 31. IRAs give you more flexibility with your 2017 contributions — you can contribute right up until you file your 2017 taxes or Tuesday, April 17, 2018, whichever comes first. You can contribute up to $5,500 per year to an IRA (or $6,500 if over age 50).

4. Make your freelance income work for your retirement

Do you do freelance work? You still have time to set up and contribute to a retirement account that will have tax benefits for the 2017 tax year. In particular, look into opening a Simplified Employee Pension Individual Retirement Arrangement (SEP IRA) account. SEP IRA accounts are specialty retirement accounts that were created for the advantage of business owners and their employees. This applies to you if you're a freelancer.

These accounts can be opened and funded independently from any other retirement accounts you have, such as traditional and Roth IRAs as well as 401(k) and 403(b) accounts from employers. Like other IRAs, you have until you file your 2017 taxes or Tuesday, April 17, 2018, whichever comes first, to set up and fund an SEP IRA for 2017. For 2017, contributions to an SEP IRA cannot exceed the lesser of 25 percent of your compensation or $54,000.

5. Prepare your deduction receipts

This is a task I always leave right until the end, but this year I'm trying to get ahead of the game. I itemize my taxes each year and have to keep track of all of my receipts to make sure I itemize properly.

Rather than letting my receipts stack up over the year, I've been tracking them in a spreadsheet each month to make my tax filing quicker and easier. Don't forget about any job-hunting expenses, either: Make sure to take special note of those expenses related to job searching, as they will be itemized in their own category.

6. Consider homeownership changes

Did you buy or sell a home in 2017? This change has huge implications on your taxes. Make sure you have all of your home purchase or sale paperwork organized so that you can account for it appropriately in your filing.

Fall offers us a slight pause before the rush of the holiday season that ushers us into the new year. Take a little time now to get a head start on tax preparations, and your future self will thank you!

Like this article? Pin it!

This article is from Christa Avampato of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How Your New Job Might Affect Your Mortgage Application

Christa Avampato — Mon, 02 Oct 2017 08:30:16 +0000

You just got a new job. Congratulations! New beginnings are an exciting part of life. If you're in the market to qualify for a new mortgage, your new beginning could have an impact on your mortgage application. Here's what you need to know. (See also: 5 Money Moves That Will Ruin Your Mortgage Application)

Continuity of some kind is key

Lenders like to see financial and career stability. If you've recently changed jobs, that's OK, provided that lenders see some kind of continuity.

For example, if your new job is in the same field that you've been in for the past two years, the lender would probably be comfortable with that. This is especially true if your new job is a promotion in title, responsibility, or salary. If you took a pay cut, but stayed in the same field, the lender would also likely find that acceptable, as long as your new income is at a level that is appropriate for the size of mortgage you want.

Stability and history in your field matters

Lenders start to get uncomfortable when you move into a brand-new field because they view that as a less stable work situation. That said, this is not an insurmountable problem. Be honest and upfront with your lender. Explain how your previous experience is applicable to your new field. This could take the form of your responsibilities, or similarity in the fields themselves.

It is also helpful if you can show that your education and any other training you've received aligns with your new role. You could secure a reference letter from your new employer, too.

Remember, getting a mortgage with a lender is a conversation. You aren't putting in an application as a faceless entity. The lender wants to know who you are, what you do, and, most importantly, how you will repay the mortgage. You need to paint a picture of yourself as a responsible professional on a stable career path.

The paperwork you need

In addition to a letter or contract, the lender will also need other paperwork to verify your income. If you have all of this paperwork together before going to the lender, your sense of organization and preparedness will work in your favor. You will need:

Your job offer letter with the details of your start date, title, and compensation. This letter should be on official company letterhead.
At least two pay stubs, though I have recently heard of lenders asking for three or four pay stubs.
The contact information for your human resources department. The lender will eventually need to talk to someone at your company to confirm the information you've provided is legitimate.

A new job and a new home are exciting prospects. Though continuity of employment eases the path to a new mortgage, many people buy a new home in conjunction with a new job. Be prepared with a solid, concise explanation of your decision to change jobs and have your paperwork in order. Also remember to shop around for a mortgage with a few different lenders to secure the best terms and rates. Happy house hunting!

Like this article? Pin it!

This article is from Christa Avampato of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How to Budget Consistently Without a Steady Paycheck

Emily Guy Birken — Fri, 11 Aug 2017 08:30:05 +0000

Freelancers, small business owners, contractors, and salespeople working on commission all have one thing in common: irregular income. Anyone who has worked in these professions knows the insecure feeling you get when you are lurching from flush months to lean months as work (and on-time payment) waxes and wanes.

Since the majority of budgeting advice starts with the assumption of a steady paycheck, it may seem like budgeting is out of reach for the average person with an irregular income. Nothing could be further from the truth. Not only can you successfully budget an irregular income, but creating and adhering to a budget can mean the difference between surviving the lean months and thriving through them. (See also: The Smart Way to Budget on a Freelance Income)

Here's how to create a budget if your income is inconsistent or irregular.

The cash flow bucket system

Before you even get started, you should know what budgeting success will look like. According to Roger Whitney, certified financial planner and podcaster, "the goal for inconsistent income is to slowly build up your savings to the point where you can pay yourself a regular monthly salary out of your cash reserves."

How do you do this? By using a method called the cash flow bucket system. With this system, instead of having your paychecks deposited into your checking account, they will go into savings. Once a month, you'll transfer the amount you need for expenses and bills into your checking account. This is your own self-created "monthly paycheck." This system is a great fit for anyone with irregular income, because it keeps excess money from burning a hole in your checking account, and will help you smooth over the irregularities in your income.

However, creating a cash flow bucket system can take a little more time with inconsistent income. Here are the steps you need to follow to get this system to work for you.

1. Capture excess income

Before you plunge headlong into depositing all of your income into your savings account, start by putting away excess cash during high-income months. This can take some discipline.

Anyone who has received irregular income knows the feeling of being flush when several paychecks or client payments come in all at once. It's very tempting to use that excess income for discretionary spending, especially if you can thank your own hustle for the huge payday. But before you blow the big check on a steak dinner, slow down and remember how tough it is to go grocery shopping with the change you pilfered out of the couch cushions.

That's why it's so important to recognize when you are experiencing a flush month and immediately put aside as much of the excess income as you can. The larger your savings account is as you start the cash flow bucket system, the easier it will be for you to smooth over the inconsistency of your income.

2. Determine your minimum budget baseline

The next step is determining your baseline expenses for a regular month. This baseline should be comprised of the expenses that are the absolute essentials for maintaining your life — such as your rent or mortgage, utility bills, transportation, groceries, and child care.

This figure should be relatively easy to calculate. Write down your fixed expenses, such as your rent or mortgage, and estimate the fluctuating expenses, such as utility bills and groceries, by figuring the average cost over the past six to 12 months.

When you know your baseline minimum, compare it to your existing savings account balance. Assuming you already have some money saved, you can see how many months' worth of minimum expenses you have set aside in your savings account — or how much you need to accumulate. It's a good idea to have three to six months' worth saved up, depending on the variability of your income. Just recognizing that you could survive with no money coming in for several months can help ease a great deal of the financial stress that comes with an inconsistent income.

3. Calculate your discretionary expenses

Once you know the bare minimum that you need to have on hand to keep the lights on and everything running, it's time to calculate how much you spend each month on discretionary purchases. This will include your spending on everything from dining out, to entertainment, to your hobbies.

It's a good idea to go over several months' worth of bank statements and credit card bills to figure out how much you have spent on average on these discretionary expenses in the past. This way, you can come up with an average monthly discretionary budget.

Be prepared to cut your discretionary spending as needed, since that can help you smooth over your inconsistent income more quickly.

The best way to pare down discretionary spending is to cut things from easiest to hardest. If you love your weekly movie date with your best friend, then make sure that $15 you spend per week is preserved in your budget. But if you get coffee at the local coffee shop out of habit rather than enjoyment, then be prepared to start brewing your own.

4. Start having your paychecks deposited into savings

Now that you've beefed up your savings account during flush months, and figured out your baseline budget level and monthly discretionary spending, you can start having your payments from clients deposited directly into savings, rather than checking. Then, on the first of each month, transfer your "monthly paycheck" from your savings account into your checking account to pay for your monthly expenses.

This is where things differ between someone with a steady paycheck and someone with irregular income. Depending on how much money you have already set aside in your savings account, and how frequently you deal with lean months, early on you may need to decide from month to month whether you will be living on your baseline budget or your baseline budget plus discretionary spending.

However, as you build up your cash reserves, you will be able to eventually switch to an automatic transfer of your baseline budget plus discretionary spending.

5. Keep an eye on the system

Your checking account will be nearly depleted by the end of the month, but if you calculated your budget correctly, the money should last you until the first of the following month.

If you find you are running short before the end of the month, you will need to look at your expenses to see where your calculation went wrong or your spending was too high. You can also decide to move more money from your savings account into your checking account or end all unnecessary spending until the next month begins.

6. Start saving for the future

The final step of budgeting irregular income is to incorporate saving for the future. While the cash flow bucket system will put excess income into your savings account and hold it for your lean months, it does not take the place of saving for retirement or other financial goals.

Once you have reached a point that you have enough savings to consistently pay yourself a monthly salary, factor saving for the future into your monthly budget. Set up an automatic transfer of that amount from your savings account to your retirement fund or (other savings vehicle). Though you won't see that money in your monthly "paycheck," you will need to factor in the deduction from your savings account.

Budgeting like a boss

Earning an irregular income can feel overwhelming. Not knowing how much you make from one month to the next may seem like a liability. But with the right money management, your irregular income can empower you to take control of your finances, your career, and your life.

Like this article? Pin it!

This article is from Emily Guy Birken of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

You Got a Raise! Now What?

Andrea Cannon — Wed, 01 Mar 2017 11:00:10 +0000

So, you got a raise! Now, it's time to start putting that money to work for you. While your first thought might be shopping spree, consider instead these other options that will build your wealth and secure your financial freedom.

Have Realistic Expectations

Your raise may sound like a lot, but once you receive your paycheck, you may be surprised to find how little your take-home pay actually changed. Don't make plans based on a quick mental calculation. Get the actual amount from your paycheck to know how the raise will actually impact you.

Make a Plan

Of course it's okay to reward yourself a bit for working hard and getting a raise. But don't just pocket the extra money and add it to your fun budget. Check your savings, credit card debt, and investments to see which areas can use a boost, and put your raise there. You can decide to put three months' worth to pay down your debt, and then take a one month break to splurge. Consider your financial goals and how every dollar makes a difference toward reaching them.

Increase Your Emergency Savings

In an ideal world, you should have a three to six month cushion in your emergency fund. If you already have a sizable emergency fund, then you don't need to worry about saving more with your increased income. Otherwise, saving more now will mean less stress later when an unexpected event hits your wallet hard.

Pay Down Debt

Paying off debt should be a priority in your plan to gain financial freedom. It can also help improve your credit score, save on interest, and reduce stress. Consider putting your raise toward debt payments. Even a small amount that you can add to your monthly payments will significantly lower the interest paid and help you pay it off faster.

Increase Your Retirement Savings

Can you put some of that raise into your retirement accounts? Your retirement contribution might also automatically increase as it is usually based on a percentage of your gross pay. Have you at least set your 401K contributions to get the full amount of matching from your employer? If you have an another retirement account, like a Roth IRA, get your annual contribution out of the way.

Refinance Your Loans

With a higher income, you may be eligible for better rates on a personal loan, mortgage, and car loan. You can apply for better loans now or wait for your credit score to increase after you've made some positive changes (such as paying down debt and lowering your debt-to-credit ratio).

Start Investing

It's never too early to pad your wealth with smart investing. These days the startup capital required is minimal. You can start investing with a few hundred dollars. Online brokerages often have a low minimum with low fees. Financial robo advisers can take a lot of the work out of figuring out what to buy. (See also: Easy Ways to Invest Your First $1,000)

Have Fun

It won't hurt to reward yourself a bit for a job well done. Have a celebratory dinner or buy an affordable gadget that you've been wanting. You can also start saving toward a vacation or other large purchase.

Prove Your Employer Right

Getting a raise means you've done a good job and deserve to be rewarded for it. Prove your employer right by continuing your positive behaviors, always putting your best foot forward, and looking forward to the next raise. You may also want to write a thank you card, especially if your manager or boss worked hard to get you the raise.

This article is from Andrea Cannon of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Be Careful Who You Owe: Here's Who Can Garnish Your Wages

Damian Davila — Tue, 25 Oct 2016 09:00:08 +0000

Benjamin Franklin once said, "In this world nothing can be said to be certain, except death and taxes." Nowadays, some people would want to update that famous quote to include "debt."

From student loans to alimony, there are several instances in which your employer must withhold a certain amount from your wages and send it to your creditor. Let's review which creditors can do this, and when they are legally allowed to claim part of your hard-earned dollars.

1. Issuers of Student Loans

With the average student loan for Class of 2016 graduates at $37,172 (up 12.64% from two years earlier), many Americans entering the workforce may feel like the main character in "Game of Loans" (Interest is coming!). Since one estimate claims that 76% of Americans are living paycheck to paycheck, you could assume that it's just a matter of time until some of them start missing some monthly payments on their student loans.

After failing to make payments for 270 days, your federal student loan is considered to be in default. The period is 330 days for Federal Family Education Loan (FFEL) Program loans. The consequences of student loan default are very severe, including:

Losing eligibility for additional federal student aid;
Damaging your credit history;
Having the federal government request your employer to withhold up to 10% from your paycheck to pay back a federal student loan;
Having up to 100% of your federal tax refunds seized through the Treasury Offset Program; and
Having authorized state guarantee agencies take up a portion of your state income tax refund.

Uncle Sam is legally allowed to withhold not only your paycheck, but also your tax refund! To prevent your student loan from being considered in default, stay in constant communication with your student loan issuer. If you are planning to miss any payments, read the fine print of your loan agreement to minimize consequences. If you're going into default, talk with your student loan officer in advance to discuss alternatives to wage garnishment, including consolidating your federal education student loans.

2. Internal Revenue Service (IRS)

When the taxman cometh and you don't answer his call, he'll seize part of your wages each pay period and send it to the IRS to cover your unpaid back taxes. Unlike other creditors, the federal government doesn't require a court order to levy your wages.

Once your employer receives a notice for wage garnishment (usually Form 668–W (ICS) or 668-W (C) DO) from the IRS, your employer must return a Statement of Exemptions and Filing Status to complete and return within three days. It's critical that your employer submits this form on time because it may help you to exempt part of your wages from garnishment according to the schedule of its Publication 1494.

For example, if you file your return as married and joint, and are able to claim four exemptions, you can exempt $951.92 from garnishment. If were to not return the statement in three days, your exempt amount is figured as if you were married filing separately with one exemption ($640.38).

Keep in mind that other income sources, including one-time bonuses, wages from additional employers, and commissions, may be levied at 100%. Besides when you pay back the remaining balance in full, the IRS will stop withholding part of your wages when you make other arrangements to pay your overdue taxes, including setting up an installment agreement, payment extension, or offer in compromise.

3. Spouse Demanding Child Support or Alimony

Love and marriage go together like a horse and carriage, until your spouse calls its quits and obtains a court order to automatically withhold child support or alimony moneys from your paycheck.

The Federal Wage Garnishment Law sets the following limits on wage garnishment on your paycheck for child support and alimony:

Up to 50% of your disposable earnings if you're supporting another spouse or child;
Up to 60% of your disposable earnings if you're not supporting another spouse or child; and
An additional 5% for support payments more than 12 weeks in arrears.

4. Other Creditors With Court Orders Against You

Last but not least, private creditors, including credit card companies and health care institutions, and federal agencies other than the IRS, can obtain a court order to start garnishing your wages. Without a court order, "take it all" threats from pushy reps from creditors are absolutely empty. (See also: 4 Annoying Things Bill Collectors Can't Do — And How to Stop Them)

The Debt Collection Improvement Act of 1996 authorizes federal agencies and collection agencies under contract to garnish up to 15% of disposable earnings to repay defaulted debts to the U.S. government. For private creditors, the Act sets a limit on wage garnishment of up to 25% of disposable earnings or up to the amount that your earnings are greater than 30 times the federal minimum hourly wage, whichever is lower. In case of economic hardship, you may be subject to lower limits for potential wage garnishment.

Besides garnishing your wages, some creditors with a court order may want to go after your personal assets. Depending on your state of residence, you may be eligible for protection exemptions on vehicles and real estate property. For example, states New Mexico and Hawaii have collection exemptions on motor vehicles of $4,000 and $2,575, respectively. Contact your State Labor Office for more details.

The Bottom Line: Inform Yourself!

Wage garnishment is scary. Fortunately, there are several steps you can take to minimize how much can be seized from your paycheck. For additional information, visit the Wage and Hour Division website from the U.S. Department of Labor or call its toll-free helpline 1-866-4-USWAGE (1-866-487-9243), available 8 a.m. to 5 p.m. in your time zone. Also, you can find the contact information of your State Labor Officefor specifics on the rules in your state.

This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Ways to Grow Your Savings Without a Steady Paycheck

Carrie Smith — Thu, 10 Sep 2015 15:00:27 +0000

Whether you're a freelancer or part-time employee, not having a regular salary can disrupt your progress toward big financial goals. Money fluctuations can mean you either have to stop the savings transfers, or withdraw money out of the account to cover bills.

But saving money without a regular paycheck isn't impossible, and with these tips you can learn to create a savings habit that sticks!

1. Separate All Your Savings Goals

Even if you have a separate savings account, it's too tempting to have all the money in one account while simply allocating the funds to different savings goals. For this reason I recommend opening a new savings account for each individual goal.

My husband and I recently did this as an experiment, and for two months in a row we've had a surplus of money in our bank accounts, and have been able to save money toward all of our goals. And we're both self-employed so you know how difficult this can be!

While it is possible to have too many accounts, this strategy works for us, and has allowed us to pay all of our bills, self-employment taxes, and save extra money toward various specific goals.

2. Pay Yourself a Regular Salary

As a freelancer, temp, or someone who works on commissions, it's still important to pay yourself a "salary" on a regular basis. I deposit a regular salary from my business account to the household account every Monday — no matter how little or how much my freelance business brings in.

Giving yourself a regular "paycheck" will help combat the inconsistent income that comes with being self-employed. It may take a few months for your budget to adjust to the changes, but it can drastically improve your finances and allow you to finally get into the habit of saving money.

3. Try a Microsaving Tool

Microsaving is when you save extremely small amounts of money — like $2 or $5 a week. As your budget adjusts to the savings, and you begin to see your small balance grow, you can increase the savings amounts. Next thing you know, you've saved a couple hundred dollars that can be used towards anything you want.

To make it even easier to save money without thinking, there are several different microsaving apps available that will put saving money into automatic mode.

Digit is a popular tool that allows you to start saving money via text message. Once you link your account, Digit will start withdrawing a few dollars every week and deposit into your new Digit account, based on your bank balance and only if you can afford it.
Acorns is a microsaving investment tool that helps beginner investors or students get their feet wet in the market. Everyone has to start somewhere and Acorn's round-up payment withdrawals makes saving money very easy.
SmartyPig allows you to create individual accounts for each savings goal and keeps you updated on the progress. You can also earn rewards, cash back, and gift cards as incentives to save money.

4. Find What Motivates You to Save

What motivates you to save money? Are you a competitive person who likes to turn saving money into a challenge? Find a few friends who will commit to a savings competition with you. Whoever reaches the goal first gets a free dinner, night out, or other incentive (paid for by the losers, of course!).

Are you an artist or visual person? Try mapping your progress by coloring in circles for each $50 or $100 you save. Whether it's goal tracking, paying off debt, or saving for a particular event, try coloring your way to reaching your goal. And when you've reached your goal you can hang the artwork in your home as a motivational reminder.

5. Join a Savings Challenge

Much like a diet helps you jumpstart your weight loss plan or workout regimen, a savings challenge can help you get your spending under control, and create a regular savings habit.

There are lots of different challenges available. You can go on a 14-day spending diet, a 60-day cash budget challenge, a year-long shopping ban. Last year I participated in a 12-month money challenge from inspiration I found on Pinterest. But the options are basically limitless, so start out small and then increase the challenge as you become more comfortable with it.

Experiment with different methods and test out strategies based on your money personality and saving style. Don't be afraid to try out new ideas to see how they work for you.

How do you save money without a regular paycheck? Share your best tips!

This article is from Carrie Smith of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How often do you get your paycheck?

Philip Brewer — Tue, 15 Jan 2008 17:37:23 +0000

One of the BlogHer featured posts (Mrs. Micah's Credit Cards: Billing Cycles and Bimonthly Paychecks) talked about a mis-match between pay dates and credit card due dates. It reminded me of just how much I used to agonize over this issue, back before I had my finances under control.

Over the years, I've been paid on just about every paycheck schedule: weekly, biweekly, half-monthly, and monthly.

The schedules

Biweekly seems to be the most common, at least in the United States. I know a lot of people who figure that one check goes for the rent or mortgage and the other check goes for a car payment or some other major expense. The pay dates tend to shift around in the month, though. Someone who counts on, let's say, the second paycheck of the month to pay their next month's rent, can get burned if the check comes unusually early and the money gets spent before the rent check gets written. (It used to be that getting the check unusually late could also be a problem--a check that arrived the last day of the month might well not have cleared before rent was due on the first. Direct deposit and ACH has probably made that a non-issue for most people.)

Half-monthly is almost like biweekly--you still get a first and a second paycheck every month--except that you miss out on the best thing about biweekly paychecks: the two months a year when you get an "extra" paycheck, because a 52-week year means that there are 26 biweekly pay periods but only 24 half-monthly ones. If your finances are under control, there's really no difference between getting 1/24th of your annual salary twice a month or 1/26th of it every two weeks. But for a person who's living paycheck-to-paycheck, those three-paycheck months can cover all manner of careless spending.

Weekly sounds great to someone who's gotten a bit too used to saying, "Wait until we get paid and then we can buy that." In practice, though, it's kind of scary, because there are ordinary monthly expenses that can't be covered by a single paycheck. Where one biweekly paycheck will commonly cover rent or the mortgage, one weekly paycheck probably won't (unless you're living in a very cheap apartment). All of a sudden, that simple budgeting scheme (first paycheck covers the car payment, second paycheck covers next month's rent) doesn't cut it any more. All of a sudden, you're having to save and budget just to get your bills paid.

Monthly has the advantage that it's the same frequency as most of your bills. Times when I've been paid monthly, the payment typically comes a few days before the end of the month--early enough that the check had cleared in time to pay the rent on the first. In my experience, it was actually better than weekly. With monthly you have to budget, but at least you have the whole month's money in one big lump.

Personal history

I got paid biweekly at my first full-time job. Then, my second employer was an old-line industrial firm that ran a weekly payroll for all the factory workers, and found it easier to just include us software types in that payroll.

With a biweekly paycheck, my bill paying was pretty simple. I'd let bills pile up as they came in, and then I'd pay them all when I got paid. It was pretty unusual for two weeks worth of bills to come to more than one paycheck. Once I moved to weekly paychecks, though, that changed. It was perfectly ordinary for one weeks worth of bills to be more than one paycheck--it happened at least twice a month.

I think that experience was what first prompted me to get my finances under control. I cut back a bit on spending, got my credit cards paid off, let some money accumulate in my checking account. When my next job turned out to pay monthly, it was not only no big deal, it was actually kind of a relief--I didn't need to do nearly as much figuring and planning ahead. I got my money, and then I paid my bills over the course of the month. It was easy.

A matter of class

There's some degree of class distinction in pay frequencies. I don't know if it's still true, but as late as the mid-1980s, payrolls in England were strictly divided between the middle-class folks (who got paid monthly by direct deposit to their bank account) and the working-class folks (who got paid weekly by their boss handing them an envelope with actual cash money inside). Even in the US there's a general sense that the working-class folks need to get paid more often (because they can't be expected to budget wisely), with the implication that people who get paid less often must be of a higher class.

Under control

Of course, none of it matters, once your finances are under control. The money flows in whenever it flows in, it flows out when the bills are due--and the surplus goes into whatever savings or investment vehicles you've selected. A large fraction of my income is now paid either annually (mutual funds that pay dividends just once a year) or semi-annual (interest payments on treasury securities). It's all the same to me.

I remember vividly the shifts from biweekly to weekly to monthly, because they made a huge difference in the way I managed my money. Since then, I've had several different payroll schedules--biweekly, half-monthly, back to biweekly--but I scarcely remember, because it never really made a difference after that.

Of course, while you're in the process of getting your finances under control, you're likely to be especially aware of these matters. It's necessary to pay close attention to the flow of money into and out of your life, in order to get a handle on your finances. It may be of some comfort to know that, once you do, it turns out not to matter so much any more.

This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: