Should You Garnish Earnings for Independent Contractors?

Part of a series  |  Wage Garnishment Insights

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If you process withholding orders for independent contractors, this information can help you stay compliant.

As the gig economy booms, companies find themselves hiring more independent contractors—and wondering how to handle wage garnishment withholding orders related to these workers. The guidelines can be confusing because they differ based on the type of garnishment (such as child support, tax debts, and consumer debts). Also, some compliance requirements don't apply when the debtor is an independent contractor since these workers are not considered employees and their earnings are not included as part of the payroll.

The determination generally boils down to a few key criteria: Who issued the withholding order? What are the applicable state's laws and regulations regarding that type of order? And what is the state's definition of income subject to garnishment?

Independent contractors and child support

All states use the federal Income Withholding for Support order (IWO) as directed by the federal Office of Child Support Enforcement (OCSE) to collect child support. The OCSE leaves no room for interpretation as to whether these orders apply to independent contractors. Per the OCSE: "If you receive an IWO for a nonemployee, and you make payments to that person, you must withhold child support from those payments."

That's one reason why it's wise to develop a solid process of handling orders for nonemployees as well as employees. In addition to reviewing your payroll logs, check your accounts payable records and other vendor-payment systems to see whether you make payments to the worker. (This is also important because the IWO requires you to confirm the worker's status.)

Note: In the case of independent contractors, the protections and limitations of the federal Consumer Credit Protection Act (CCPA) do not apply. To find state-specific limits for these workers, visit the OCSE's Income Withholding Matrix.

Tracking those who owe child support

Child support programs face a challenge: Locating the companies with employees and contractors obligated to make child-support payments.

The Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) of 1996, mandates employers to report specific information on their newly hired employees to a designated state agency. States enter this information into a State Directory of New Hires; they also forward it to the National Directory of New Hires (which is then accessed by other states and agencies). The data is critical to child support programs. The OCSE reported in its FY21 preliminary data that over 69.7 million employees were reported as part of this process.

While federal law does not mandate that you report hiring nonemployees, 18 states require you to do so—and that list will likely continue to grow.

Independent contractors and other garnishments

When it comes to garnishing payments to nonemployees for consumer debts (a.k.a. creditor garnishments), state laws can differ. Be sure to check the applicable state's definition of earnings subject to wage garnishment. For example, Colorado and Virginia make it clear companies must withhold earnings of independent contractors for consumer debts. However, not all states require companies to withhold payments to independent contractors for all types of debts.

If allowable under state law, agencies and creditors will seek to have a non-wage order issued to collect on the debt (or will garnish the worker's bank account). This notice may not look like a wage garnishment order; it may be styled as a non-wage order, a levy, or something else. Regardless of how it appears, you are required to follow its directives.

Reduce your risk

ADP Wage Garnishments, one of the solutions offered in ADP's suite of ADP SmartCompliance® solutions, helps you process withholding orders for earnings paid through payroll. Download the SmartCompliance® guidebook to learn how ADP solutions can reduce administrative burdens while helping you maintain or improve compliance.