If you don't pay all your federal and state taxes on time, and refuse to cooperate with the IRS's efforts to collect those taxes, the IRS might issue a "tax levy" against your wages. Your employer will then have to deduct from your wages whatever amount you owe the IRS, plus penalties and interest charges. If this amount is small, it will be taken from one paycheck. Deductions for larger tax bills will be spread out over several pay periods. This deduction won't affect any of the current taxes you're paying on your wages.
Whe you've paid your entire tax bill, including penalties and interest, the IRS will send written notice of this fact to your employer. At this point, the involuntary deductions will stop. State tax levies work the same way federal tax levies do.
Form 668-W, Notice of Levy on Wages, Salary and Other Income. This is the form that the IRS sends your employer to demand that some of your wages be withheld. It has six parts. It's important that you understand this form, and what you're expected to do with the parts you have to fill out.
- Part 1 is your employer's copy. It notifies your employer of the levy amount (the total taxes you owe), the need to deduct this amount from your wages, and where to send the money.
- Part 2 is your copy of the notice. Keep it for your records.
- Parts 3-5 ask you for information about your income tax filing status (single, married filing jointly, etc.) and about any dependents you claim as personal exemptions. This information will go to your employer and to the IRS. Your employer needs it to determine how much of your take-home pay is exempt from the tax levy (see below).
- Return Parts 3 and 4 to your employer as quickly as possible. Your employer needs this information from you within three days of receiving the 668-W form from the IRS. If you don't turn these pages back in, the IRS will tell your employer how much to deduct from your pay.
- Your employer sends Part 3 to the IRS and keeps Part 4.
- Part 5 is your copy of the information you supplied to your employer: your tax filing status and personal exemptions. You should keep this for your records.
- Part 6 is kept by the IRS.
The part of your pay that is subject to tax levy. There is a limit to the amount of your wages the IRS can have withheld. Some of your take-home pay is exempt from deduction, based on your estimated living expenses. Your take-home pay is equal to your gross pay minus any amounts withheld by your employer, like taxes. The following is a list of taxes and deductions that your employer can take out of your gross pay.
- Federal, state, and local income taxes, as well as employment taxes (social security and Medicare).
- Any other involuntary or voluntary deductions already being withheld from your wages when the IRS issued the tax levy against you. The amount of these deductions can be increased when necessary. Suppose, for instance, that you're having a certain percentage of your salary put into a retirement plan each payday. Your supervisor gives you a raise. Since your salary goes up, the deduction for your retirement plan will also go up. Your deductions can also increase as a result of a hike in the cost of your benefits.
- Any additional, required deductions that are introduced by your employer after the IRS issues the levy.
Based on your tax filing status and the number of personal exemptions you claim on Form 668-W, your employer determines the amount of your income that is exempt from the tax levy. This exempt amount is subtracted from your take-home pay and paid to you. The rest of your take-home pay goes to the IRS to pay off your tax bill.
The tax levy and other involuntary deductions. Bankruptcy orders always have to be paid before tax levies. Child support withholding orders, if they were already in effect when the levy was issued, also have to be paid before you pay the IRS. Otherwise, your employer has to satisfy your tax levy before all your other involuntary deductions. If you've got more than one tax levy against your wages, and your earnings can't pay for all of them, your employer generally has to satisfy the one received first before turning to the others.