How to Process Employee Withholding Orders for Taxes | Brotman Law (2024)

In an earlier chapter, we touched on wage garnishment as a means for the FTB to collect unpaid taxes. However, the other side of the fence can be if you are an employer and are called upon by the FTB to garnish wages of any of your employees.

Although you’ll find yourself jumping through some hoops upon an EWOT notification for an employee, you can’t fire someone for the added paperwork unless you’re willing to risk a discrimination suit. Employers who violate the federal law onfiring over a garnishmentcan be sued for reinstatement and back pay (Cal. Fam. Code § § 5235, 5241; Lab. Code § 2929). In some cases, you could even be criminally prosecuted.

As an employer, being served with an income withholding order can be a disconcerting experience. These orders can come from a variety of sources, but they are all legally binding and require careful handling. Understanding how these orders work, what your obligations are regarding them, and how to comply with them is very important.

Failing to do so can have severe consequences for you and your business.

As an employer, you may receive an income withholding order in relation to one of your employees. These arewage garnishments, where employers are required to withhold a portion of the employee’s income and pay that money to the issuing agency in order to repay an outstanding debt.

The debt may be in relation to child or spousal support, student loans, or other existing debts. One common reason is to repay an unpaid tax debt, and, in this case, the order will be an Earnings Withholding Order for Taxes or EWOT.

This is issued under authorization ofSections 706.070 through 706.084 of the California Code of Civil Procedureto enforce payment of a tax liability currently due to the State of California. As with any court order, you must comply. It is illegal not to do so and you may be held personally liable for the debt.

Before taking any other action, read the document carefully to identify the issuing party. Notify all parties involved that you are in receipt of the order in the manner specified below.

If there are multiple withholding orders, determine the priority of the orders as outlined below.You will need to determine the amount to be withheld and make arrangements for payments to be made to the issuer.

You must complete the following actions within the mandated time period or be in contravention of the order:

• Deliver Employee’s Copy Pages 1A, 1B, and 3 to the employee within 10 days of receipt.
• Complete and return the Employer’s Acknowledgement, Page 2A and Page 2B (if applicable), within 15 days of receipt.

EWOT payments are made in the amount of 25 percent of an employee’s disposable income.

Disposable income is calculated as follows:

• Calculate your employee’s gross income. That includes the total amount of all wages, salary, commissions, bonuses, and vacation pay.
• Subtract deductions that are required by law, like federal and state income tax, State Disability Insurance, Social Security, and Medicare.
• Donotsubtract payments to which the employee has agreed voluntarily, such as union dues, 401K contributions, health or life insurance contributions, or charitable contributions. This also includes existing spousal or child support payments and any existing payments that the employee has agreed to make to creditors.
• The amount that remains is the employee’s disposable income. Each EWOT payment will be 25 percent of that amount unless the amount falls below the minimum which is specified on Page 6 of the EWOT.
• You may also deduct $1.50 from the employee’s pay for each EWOT payment as reimbursem*nt for your time in making the payments.

If there is more than one withholding order issued, the priority is as follows:

• First Priority: Court-ordered withholding orders for child or spousal support.
• Second: Jeopardy Withholding Order For Taxes (JWOT)
• Third: Earnings Withholding Order For Taxes (EWOT)
• Fourth: Earnings Withholding Order (EWO)

If a higher priority order, such as a court ordered withholding order for child support or JWOT, is issued after an EWOT, it takes priority.The EWOT will then be calculated as the remainder of 25 percent of the disposable income, if any.

The total withheld cannot be more than 25 percent of the employee’s disposable income, so if the child/spousal support order exceeds that amount, the EWOT ceases to be in effect.

If a second EWOT is issued when a first EWOT is in effect, the first EWOT remains in effect and is not displaced. The second issuer should be notified that the first EWOT is in place, and you are already withholding on that order. An EWO will be displaced by an issued EWOT.

If the employee’s disposable income falls under the specified minimum, then no monies should be withheld. If the disposable income is above the minimum but under a specified threshold, the money withheld will be the difference between those two amounts where that is less than 25 percent. The amounts are laid out on Page 6 of the EWOT.

• With each payment that you send, include a copy of Employer’s Copy Page 1A of the EWOT
• The first payment should be sent at the end of the next pay period,i.e.,the one that occurs at least 15 days after receipt of the order
• Continue making payments until the balance of the EWOT is paid, you receive written instructions that the EWOT is withdrawn, or you receive a higher-priority Earnings Withholding Order.

Either you or your employee may have questions about this process. Below are the answers to some of the more commonly raised issues.

1. My employee claims that the payment will create a hardship. Can I adjust the payment?

No. Your employee may apply to the issuing agency for a review of the EWOT, which will be determined on a case-by-case basis. If it is determined that your employee’s circ*mstances warrant an alteration in the EWOT, you will be notified in writing. Without that instruction, you are required to comply in the terms specified.

Code of Civil Procedure (CCP) section 706.153 states that if an employer is deferring or accelerating an employee’s earnings in an attempt to defeat or diminish the CDTFA’s rights under the EWOT, the CDTFA may bring civil action against the employer.

The CDTFA is authorized to hold a taxpayer’s employer liable for earnings the employer withheld pursuant to an EWOT but failed to remit to the CDTFA.

The taxpayer must provide substantiating evidence (e.g., payroll documentation) to the CDTFA identifying amounts withheld as the result of a wage garnishment that was not remitted to the CDTFA.

2. The employee has left the company.

If they have left the company permanently, you should complete the Employer’s Acknowledgement, Page 2A, and return.If the employee is out on disability, leave of absence or for any other temporary reason, and is expected to return within 12 months, you should withhold the monies as directed once they return to work and resume receiving an income.

3. Can I send one check if multiple employees are being levied?

Yes. However, you should specify which amounts apply to each employee. The check should identify each employee’s SSN, name, tax year,and amount.

4. My employee claims that the EWOT is in the wrong amount or that the order has been canceled.

You are legally obligated to continue the order until told otherwise by the issuing agency.If the employee believes that there has been a mistake, advise them to contact the issuing agency and request that the EWOT be terminated or changed.

Their case will be reviewed, and if there is a change in your obligations you will be instructed by the issuing agency in writing.

5. When may I stop making payments?

All withholding payments should continue until either the full amount of the EWOT has been satisfied or a termination order is sent by the issuer of the EWOT.

If you receive a higher priority notice, contact the issuing agency to inform them, and then adjust payments as outlined above.

While complying with an EWOT may cause some inconvenience to you as the employer, it is extremely important that you understand your obligations and comply.

Both state and federal law provide some protection to employees who have a withholding order, so please seek legal advice if you are considering terminating your employee on the grounds of the withholding order.

A Continuous Order To Withhold (COTW) is a legal order seizing funds from a miscellaneous payer and remains in effect for up to a year from the date the COTW was issued.

A COTW attaches rents, commissions, or scheduled payments from a sale of property, or any other type of asset where continuous multiple payments are made. COTW payers do not include funds held by a bank or escrow company.

A COTW attaches 100 percent of the available funds at the time they are received but does not exceed the amount due on the order.

A COTW is valid until the amount on the order is withheld in full or the 12 months have expired. The total amount due includes the total tax, penalties, fees, and interest to the date of the COTW. Applicable tax years are all tax years with liabilities receiving due process that are due and payable.

FTB staff may modify or withdraw an OTW/COTW to ensure the fair and reasonable collection of tax revenue and to assure funds are not over collected.

FTB staff may modify or withdraw an OTW/COTW for the following reasons:

• Account balance indicates liability is lower than amount on the order
• Delinquent/amended returns have been processed and decreased original balance due
• Adjustments/corrections/errors reduce liability
• Received certified funds
• Verifiable funds allocated for payroll
• Lack of due process
• Liability is paid in full
• Financial hardship
• Agreement is made with the debtor allowing additional time for payment

FTB staff is required to thoroughly review and verify all supplied documentation prior to modifying the order.

When modifying or withdrawing an OTW/COTW, FTB staff must document the basis of the action, and cite all supporting documentation. FTB staff should fax a copy to the bank and follow up by sending the hard copy via first-class mail.

Wage garnishments are fairly common. While the majority of them are for child support and student debt, tax levies also impact both employees and employers.In fact, one in 14 workers carries a wage garnishmentand an estimated 12 percent of those with a garnishment have more than one type.

Compliance with federal and state wage garnishments is a necessary part of doing business for many employers. Lack of compliance can be expensive. My experience with the FTB and understanding how these orders work, as well as what the obligations of an employer are, could help you to avoid problems with the state. As an employer myself, I am well aware of my own responsibilities in this matter. If you need further assistance, please give my office a call to set up a consultation.