How to Set Up Garnishment in QuickBooks Desktop

Receiving a wage garnishment order for an employee means you have a legal obligation to withhold their earnings, and setting it up incorrectly can lead to serious compliance issues. This guide provides a clear, step-by-step process for properly configuring garnishments in QuickBooks Desktop, ensuring you handle this sensitive task accurately from start to finish. We'll cover everything from creating the right payroll items to running payroll and remitting the funds.

First, Understand the Garnishment Order

Before you touch anything in QuickBooks, you must thoroughly understand the legal document you received. A wage garnishment is a court or government agency order requiring an employer to withhold a portion of an employee's earnings for the payment of a debt. These are not optional requests.

There are several common types of garnishments, each with its own set of rules:

• Child Support: Often the highest priority garnishment and can have specific state-level requirements.
• IRS or State Tax Levies: Federal or state demands for unpaid back taxes. These usually take precedence over most other garnishments, except for some child support orders.
• Federal Student Loans: Garnishments for defaulted government-backed student loans.
• Creditor Garnishments: Orders from courts for unpaid debts like credit cards, medical bills, or personal loans.

Failure to comply correctly and on time can result in penalties for your business. Your primary task is to execute the instructions in the order precisely as written.

Gathering the Required Information

Before beginning the setup in QuickBooks Desktop, collect all necessary details from the garnishment order and have them on hand. This will make the process much smoother and prevent errors.

Create a small checklist with the following information:

• The Order Itself: Have the physical or digital document ready to reference.
• Employee Details: The full name and any identifiers for the W-2 employee.
• Recipient of Funds: The name and full mailing address of the court, agency, or plaintiff that will receive the withheld money.
• Unique Identifiers: The case number, court docket number, or other reference number that must be included with the payment for proper crediting.
• Withholding Amount: The exact dollar amount or percentage to be deducted each pay period. Pay close attention to whether it's based on gross pay or disposable earnings (pay after statutory deductions like taxes).
• Total Debt Amount (Limit): The full outstanding balance if one is specified. For things like creditor judgments, this is common. For ongoing obligations like child support, there may not be a limit.
• Administrative Fees: Some states allow employers to withhold a small fee to cover the administrative cost of processing the garnishment. Check the order or state law to see if this is permitted and for how much.

Step-by-Step Setup in QuickBooks Desktop

With your information gathered, you can now configure QuickBooks. The process involves creating new payroll items and then assigning them to the correct employee profile.

1. Create the Garnishment Deduction Payroll Item

First, you need to create a Deduction item that will handle the withholding itself. This tells QuickBooks to subtract money from the employee's paycheck for the garnishment.

1. Navigate to the top menu and select Lists > Payroll Item List.
2. At the bottom left, click the Payroll Item button and select New.
3. The Payroll Item wizard will open. Choose Custom Setup and click Next.
4. For the item type, select Deduction and click Next.
5. Name the deduction. Be specific. Don't just call it "Garnishment." Use a clear identifier like "Child Support - Jones" or "IRS Levy - Doe." This is vital for avoiding confusion if an employee has multiple garnishments or if you have several employees with them.
6. On the "Agency for employee-paid liability" screen, you'll specify where the money goes.
   • In the first field, enter the name of the agency or creditor receiving the payment (e.g., "State Child Support Enforcement Unit"). You will likely need to click "Add New" to set them up as a vendor.
   • In the second field, enter the employee's case or account number from the order.
   • In the third field, a liability account will be auto-selected, usually "Payroll Liabilities." It is best practice to create a more specific sub-account from your Chart of Accounts, like "Garnishments Payable," for cleaner tracking.
7. Tax Tracking Type: This is a critical step. From the dropdown, select None. Most garnishments are calculated on disposable income, which is after taxes have been withheld. Setting it to "None" ensures the deduction doesn't incorrectly lower the employee's taxable wages.
8. Taxes: The next screen will show a list of payroll taxes. Do not change anything here. Since you selected "None" for tax tracking, QuickBooks will handle the calculations correctly. Click Next.
9. Calculate based on quantity: Select Neither. Click Next.
10. Gross vs. Net: Choose to calculate this deduction on net pay.
11. Default Rate and Limit: This screen is where you input the financial details from the order.
    • In the Rate field, enter the fixed amount (e.g., 250.00) or the percentage (e.g., 15%) to be withheld each pay period.
    • If the order includes a total amount owed, enter it into the Limit field. Once the cumulative deductions reach this limit, QuickBooks will automatically stop the withholding. If it's an ongoing payment with no end date, leave the limit field blank.
12. Click Finish to save the new payroll item.

2. Assign the Garnishment to the Employee

Now that you've created the deduction, you need to add it to the specific employee’s payroll profile so it runs with each paycheck.

1. Go to the Employee Center from the main toolbar or navigate to Employees > Employee Center.
2. Double-click the name of the employee subject to the garnishment to open their profile.
3. Select the Payroll Info tab on the left.
4. In the large box section labeled "Additions, Deductions, and Company Contributions," find the first empty row under the Item Name column.
5. Click the dropdown arrow and select the specific garnishment deduction item you just created (e.g., "Child Support - Jones").
6. The per-paycheck Amount and the total Limit (if any) you set up earlier will automatically populate. You can leave them as is, or you can override them here if this specific garnishment has a unique circumstance. It is generally best to rely on the payroll item’s default settings for consistency.
7. Click OK to save the changes to the employee's profile.

If you also need to set up a small administrative fee (as an addition for the company), you would follow similar steps to create an "Addition" payroll item, name it clearly, link it to an "Other Income" account, and add it to the employee's profile.

Running Payroll and Paying the Liability

With the setup complete, the Garnishment will now be handled automatically when you process payroll. However, your job isn't done after withholding the money; you must remit it to the proper agency.

Processing the Paycheck

Run your payroll as you normally would. When you get to the "Preview Paycheck" screen for the affected employee, click on the employee's name to see the full detail. In the "Other Payroll Items" box, you will see your garnishment deduction listed, and the correct amount will be subtracted from their net pay. This is your chance to verify that everything is calculating as expected before you finalize the payroll run.

Paying the Withheld Garnishment

Simply withholding the funds is not enough. You must send the payment to the recipient agency in a timely manner, as defined by the order.

1. Navigate from the top menu to Employees > Payroll Taxes and Liabilities > Pay Scheduled Liabilities.
2. In the list of liabilities due, you will see the garnishment you collected. It will be listed under the vendor name you assigned to it (e.g., "State Child Support Enforcement Unit").
3. Check the box next to the garnishment liability that you need to pay.
4. Click View/Pay to open the liability check screen.
5. Verify the payee and the amount. QuickBooks will automatically create a check from your business bank account. Review the dates to ensure you are paying for the correct period.
6. Click Save & Close or Print to issue the physical check. Remember to write the case number on the check memo line and mail it promptly.

Best Practices for Managing Garnishments

• Keep impeccable records. Store a copy of the official court order in a secure, confidential employee file. Document every payment you make, including the check number and date mailed.
• Respect legal priorities. An employee may have multiple garnishments. Federal and state laws dictate the order of precedence. For example, child support and tax levies almost always come before consumer debt. If you receive multiple orders for one employee, consult with legal counsel to ensure you are distributing the funds correctly.
• Be aware of legal limits. The Consumer Credit Protection Act (CCPA) restricts how much of an employee's disposable income can be garnished. QuickBooks does not automatically check or enforce these legal caps. It is your responsibility as the employer to ensure the amount entered complies with federal and state regulations.
• Communicate carefully. Handle the matter discreetly and respectfully with your employee. Inform them that you have received the order and provide them with a copy. They have a right to understand what is being withheld from their pay.

Final Thoughts

Setting up a wage garnishment in QuickBooks Desktop requires careful attention to detail, but following a structured process makes it manageable. By creating specific payroll items, linking them properly to the employee, and establishing a consistent routine for paying the liability, you can ensure your business remains compliant and avoids legal risk.

Often, "quick questions" from clients about garnishments can touch on complex state-specific rules, such as administrative fee limits or payment priorities. Getting these details right is critical. Instead of spending time searching state labor websites, you can get reliable, citation-backed guidance with Feather AI. We help you answer these detailed compliance questions instantly, making sure your advice is accurate and giving you more time to help your clients run their businesses.