Fundamental Payroll Involuntary and Voluntary Deductions Questions and Answers — Questions and Answers
Question 1: An employee has a gross pay of $1,200. Legally required deductions (federal, state, FICA taxes) total $250. The employee also has voluntary post-tax deductions for union dues ($20) and a charitable contribution ($30). For the purpose of calculating a creditor garnishment, what are the employee's disposable earnings?
- $950 (Correct answer)
- $900
- $1,200
- $930
Correct answer: $950
Disposable earnings, as defined by the Consumer Credit Protection Act (CCPA) for garnishment purposes, are the gross earnings minus only legally required deductions. Voluntary deductions like union dues and charitable contributions are not subtracted. Therefore, the calculation is $1,200 (Gross Pay) - $250 (Legally Required Deductions) = $950.
Question 2: An employee is subject to a child support order. They do not support another spouse or child and are more than 12 weeks in arrears. According to the Consumer Credit Protection Act (CCPA), what is the MAXIMUM percentage of their disposable earnings that can be withheld?
- 50%
- 60%
- 65% (Correct answer)
- 25%
Correct answer: 65%
The CCPA sets the maximum for child support withholding at 60% of disposable earnings if the employee is not supporting another spouse or child. This limit increases by an additional 5% (to 65%) if the support payments are more than 12 weeks in arrears.
Question 3: An employer receives a federal tax levy, a creditor garnishment, and a child support order for an employee. Which of these involuntary deductions generally has the highest priority?
- Creditor garnishment
- Child support order (Correct answer)
- Federal tax levy
- Whichever order was received first
Correct answer: Child support order
The generally accepted order of priority for involuntary deductions places child support orders first. Federal tax levies are typically second, followed by other federal, state, and local garnishments, with creditor garnishments having a lower priority.
Question 4: Which of the following is a key characteristic of a voluntary wage assignment?
- It is mandated by a court order.
- The employee can typically revoke it at any time. (Correct answer)
- The CCPA's percentage limits always apply.
- It takes priority over all court-ordered garnishments.
Correct answer: The employee can typically revoke it at any time.
A voluntary wage assignment is an agreement between an employee and a creditor, and unlike a court-ordered garnishment, the employee can usually revoke the authorization in writing at any time. It is not court-ordered, and the CCPA's protections on withholding limits do not apply to these voluntary arrangements.
Question 5: Under the Consumer Credit Protection Act (CCPA), the amount of an employee's disposable earnings that can be garnished for an ordinary debt (not child support or taxes) is the lesser of 25% of disposable earnings or the amount by which disposable earnings exceed:
- 40 times the federal minimum wage.
- 50 times the federal minimum wage.
- 25 times the federal minimum wage.
- 30 times the federal minimum wage. (Correct answer)
Correct answer: 30 times the federal minimum wage.
The CCPA protects a certain amount of an employee's earnings from garnishment. For ordinary garnishments, the maximum amount that can be withheld is the lesser of 25% of disposable earnings or the amount by which the employee's weekly disposable earnings exceed 30 times the current federal minimum wage.
Question 6: An employee enrolls in their company's 401(k) retirement plan and Section 125 health insurance plan. Which statement correctly describes the tax treatment of these voluntary deductions?
- Both deductions are taken after all taxes have been calculated.
- Both deductions are typically taken on a pre-tax basis, reducing taxable income. (Correct answer)
- The 401(k) is pre-tax, but the health insurance is post-tax.
- The health insurance is pre-tax, but the 401(k) is post-tax.
Correct answer: Both deductions are typically taken on a pre-tax basis, reducing taxable income.
Contributions to a traditional 401(k) plan and premiums for a qualified Section 125 health insurance plan are both considered pre-tax deductions. This means they are subtracted from gross pay before federal income tax, and in most cases, Social Security and Medicare taxes are calculated, which lowers the employee's overall taxable income.
Fundamental Payroll Involuntary and Voluntary Deductions Questions and Answers
An employee has a gross pay of $1,200.
Legally required deductions (federal, state, FICA taxes) total $250.
The employee also has voluntary post-tax deductions for union dues ($20) and a charitable contribution ($30).
For the purpose of calculating a creditor garnishment, what are the employee's disposable earnings?