How to Record a Garnishment Journal Entry

Garnishments represent a legal directive requiring an employer or financial institution to withhold funds from an individual’s wages or assets. These withheld amounts are directed towards satisfying a debt owed by that individual. Accurate accounting of these transactions is important for financial records and legal compliance. The process involves specific steps, from identifying the type of garnishment to making the appropriate journal entries for withholding and remitting funds.

Garnishment Fundamentals for Accounting

A garnishment involves several parties: the debtor, who owes the money; the creditor, to whom the money is owed; the employer, acting as the garnishee; and typically a court or government agency that issues the order.

The employer’s role is to act as a withholding agent, legally obligated to deduct specified amounts from an employee’s earnings. Failure to comply with a valid garnishment order can result in the employer being held liable for the debt.

Common types of wage garnishments include those for child support, defaulted student loans, unpaid taxes, and general consumer debts. Each type of garnishment may have different federal limits on the percentage of disposable earnings that can be withheld, though employers must always adhere to the law that results in the least amount garnished.

Gathering Details for Recording

Before creating a garnishment journal entry, specific details from the garnishment order must be accurately collected. This includes the exact amount to be garnished from each pay period, which may be a fixed sum or a percentage of disposable earnings. Disposable earnings are defined as the employee’s gross pay minus legally required deductions like federal, state, and local taxes, as well as Social Security and Medicare taxes.

It is also important to identify the employee’s name, the specific type of garnishment, and the name and address of the entity or agency to whom the funds must be remitted. Any case or reference numbers provided on the order are also critical for proper tracking and communication with the garnishing authority. Gathering these details precisely helps ensure correct calculations and timely remittance, avoiding potential penalties.

Creating the Garnishment Journal Entry

Recording a garnishment involves making a journal entry that impacts both expense and liability accounts. When an employer processes payroll and withholds a garnishment, the initial journal entry recognizes the expense of the gross wages and simultaneously records the liability for the amount withheld. This liability represents money collected from the employee that is owed to a third party.

For example, assume an employee has gross wages of $1,000, and $100 is garnished for child support, with other standard deductions totaling $200. The journal entry for payroll processing would debit Wages Expense for $1,000. It would then credit various liability accounts for the standard deductions (e.g., Federal Withholding Payable, FICA Payable) totaling $200, credit Garnishment Payable for $100, and credit Wages Payable (or Cash, if paid immediately) for the net amount of $700. This entry reflects the employer’s wage cost and the liability from withholding garnished funds.

Remitting Garnished Funds

After the garnishment has been withheld and recorded as a liability, the next step involves remitting these funds to the appropriate authority. This action requires a separate journal entry to reduce the previously recognized liability and reflect the outflow of cash. The employer is responsible for making timely payments as specified in the garnishment order, which often ranges from a few days to a few weeks after the pay period.

When the garnished funds are remitted, the journal entry will debit the “Garnishment Payable” account, thereby decreasing the liability. Simultaneously, the Cash or Bank account will be credited to reflect the money leaving the business. For example, if $100 was held as Garnishment Payable, the entry would be a $100 debit to Garnishment Payable and a $100 credit to Cash. This entry effectively clears the liability from the employer’s books, confirming that the obligation has been fulfilled.