IRS wage levy on an employee: what the employer must do

The envelope comes addressed to the company, not to the worker. Inside is Form 668-W, the IRS notice of levy on wages, salary and other income, naming one of your employees and a dollar figure that has nothing to do with your business. We see this land on Oklahoma payroll desks with some regularity, and the first reaction is almost always the same: this is between the IRS and the employee, so why is it our problem?

Because an IRS wage levy makes the employer a party. Federal law puts the duty to turn over the money on the person holding it, and it puts personal liability on the person who fails to do so. What follows is the sequence in the order it actually happens, from the day the notice arrives to the day the release form shows up.

What if the IRS wage levy arrives in the mail?

Start with what a levy is. Once tax is assessed, demanded, and not paid, the IRS has a lien on what the taxpayer owns, and a levy is the act of taking property to satisfy that lien. The federal tax lien under Section 6321 is the background claim; the levy is the collection step.

A levy on wages does not come out of nowhere. Under Section 6331(d), the IRS must send written notice of its intent to levy, delivered in person, left at the taxpayer's home or business, or sent by certified or registered mail, at least 30 days before the levy is made. That notice explains appeal rights and alternatives such as installment agreements. By the time your company receives Form 668-W, the employee has already had that warning. The IRS is running a lawful process after prior notices, and it is worth saying plainly that the employer is a stakeholder in that process, not the adversary.

The IRS uses two main levy forms against third parties. Form 668-W, in its ICS or ACS version, reaches wages, salary and other income, and it also serves as notice of levy on benefit and retirement income. Form 668-A reaches other property a third party holds, such as bank accounts and business receivables. If a vendor or customer of yours is levied, the paperwork may be a 668-A against what you owe them. This article is about the 668-W.

Timing matters from the first minute. The IRS generally delivers levies by mail, and the date and time the form arrives is when the levy is made. Record it. A wage levy differs from a bank levy here: a bank must hold funds in the account as of the moment of receipt and wait 21 days before sending them, while an employer generally has at least one full pay period after receiving the form before any wages have to be sent to the IRS.

Who in the company is on the hook

Section 6332(a) requires any person in possession of property subject to levy to surrender it on demand, unless the property is already subject to a judicial attachment or execution. Section 6332(f) then defines "person" to include officers and employees of a corporation, and members and employees of a partnership, who have the duty to surrender the property.

In a closely held company, that is usually the owner who signs payroll, the controller, or an outsourced bookkeeper acting on the owner's instruction. The levy is addressed to the company, but the statute looks through to the individual with the duty to comply.

What if the employee has three days to respond?

Form 668-W comes with a Statement of Dependents and Filing Status. The employer hands that statement to the employee, and the employee must return it within three days. If it does not come back in that window, the exempt amount is computed as though the employee were married filing separately with zero dependents.

That default is where most employees lose money through plain inattention. A worker with a spouse and children who files jointly will see a far smaller protected slice of each paycheck than the law would otherwise allow, and the difference goes to the IRS rather than to groceries. The three days are short, and the form arrives through the employer, who may not realize that the clock is running against the employee rather than the company.

A quiet word from payroll that the form needs to come back immediately costs the company nothing and is well within the role the IRS itself asks employers to play.

The statute behind this is Section 6334(d). Unless the taxpayer submits a written and properly verified statement, the exempt amount is computed on the least favorable basis, which the code describes for years when the personal exemption is zero as married filing separately with no dependents. The IRS's framing and the statute line up.

How the exempt amount works

Not every dollar of a paycheck can be taken. Section 6334(a)(9) exempts wages, salary and other income for a pay period to the extent they do not exceed the applicable exempt amount, and subsection (d) ties that amount to the standard deduction plus an amount that depends on the dependents the employee is allowed for the year the levy is served, divided across pay periods.

The IRS mails Publication 1494 with every Form 668-W. The publication explains how the employer computes the exempt figure from the employee's filing status and dependents. We are not reproducing those figures here because they change each year; the current publication is the only safe reference, and the one that arrived with the levy is the one to use.

Two features of the exempt amount surprise employers.

• The exemption may belong to someone else. If the employee has other sources of income, the IRS may apply the exempt amount against that other income and levy 100 percent of what a particular employer pays. The levy form governs, and if it directs full remittance the employer follows it.
• Court-ordered child support is handled by the IRS, not by the employer's judgment. Support ordered before the levy was received can be released from the levy, but the employee must ask the IRS, using the phone number on the levy form. A child whose support is released from the levy cannot also be claimed as a dependent on the statement.

The employee may also submit a new Statement of Dependents and Filing Status if the levy continues into a new calendar year, and may ask the employer to recompute the exempt amount from that point. An employer who keeps using the prior year's figures after a new statement arrives has drifted from the rules.

What if the first remittance is due?

Once the exempt amount is known, the mechanics are simple to state. The employer pays the employee the exempt portion and sends the rest to the IRS, each pay period, until the levy is released. Section 6331(e) makes a levy on salary or wages continuous from the day it is first made until it is released under Section 6343, which is why a 668-W does not need to be reissued every pay period the way a bank levy would.

Here is the asymmetry that makes this a legal question and not just a payroll task. The form shows a Total Amount Due calculated through a date printed on it. Interest and any applicable penalties keep accruing after that date. Only the taxpayer can obtain the updated payoff figure, and the IRS's own guidance states that this information cannot be released to the employer.

So the employer is the person with personal exposure for getting the remittance wrong, and also the person the IRS will not tell the payoff figure. The practical consequence is that an employer should keep remitting under the form until a release arrives, rather than stopping on the employee's say-so that the balance is paid. The number on the form is a floor, not a ceiling.

The cost of not complying

Section 6332(d)(1) makes a person who fails or refuses to surrender property on demand personally liable to the United States for the value of the property not surrendered, capped at the amount of tax the levy was issued to collect, plus costs and interest at the underpayment rate under Section 6621. Section 6332(d)(2) adds a penalty of 50 percent of that amount when the failure is without reasonable cause, and that penalty is not credited against the employee's tax.

Read those two paragraphs together with the definition of person in subsection (f) and the picture is clear. An owner who decides to protect a valued employee by ignoring the levy has converted the employee's tax debt into the owner's own debt, with a possible half-again penalty on top. We understand the impulse. The statute does not.

The government-favorable view here deserves its airtime. The levy exists because the taxpayer did not respond to the earlier notices, and the employer's compliance is what keeps the system from needing a lawsuit to collect every delinquent account. Congress set the stakes high precisely so that a third party would not have to weigh loyalty against the law.

The protection for complying

There is a corresponding shield. Section 6332(e) provides that a person who surrenders property in response to a levy, or who pays the liability under subsection (d)(1), is discharged from any obligation or liability to the delinquent taxpayer and any other person arising from the surrender. An employee cannot sue the company for wages the company sent to the IRS under a valid levy. That discharge is the reason compliance is the safe path, and it works only if the employer actually complied.

What if a bonus or commission is paid separately?

For levy purposes, wages include fees, commissions, bonuses and similar payments. The exempt amount, though, attaches to a pay period. When a bonus is paid separately from regular pay, the IRS guidance is that the exemption has already been applied to that period's regular wages, so no further amount is exempt and the IRS would receive the entire bonus.

This surprises sales organizations and year-end-bonus companies most. A commissioned employee under levy may see routine paychecks largely protected and quarterly commission checks taken whole. The employer who nets the bonus into a regular payroll run and applies the exempt amount a second time has given the employee money the IRS was entitled to, and under subsection (d) that shortfall can become the employer's own liability.

In our experience the cleanest approach is for payroll to treat every separate payment to a levied employee as a question to be answered from the form and Publication 1494 before the money moves, rather than afterward.

What if the employee wants the levy to stop?

The levy ends when the IRS issues Form 668-D, Release of Levy/Release of Property from Levy. That happens when the tax is paid in full, and the IRS may also release the levy when other payment arrangements are made. The IRS states that a levy may be released if it is causing an immediate economic hardship or was issued in error.

Those are the employee's paths, and they are real. Each of them runs through the IRS, not through the employer. The IRS asks employers to encourage the employee to contact it directly, and that is a reasonable role for the company. What the employer cannot do is decide on its own that the levy should stop. Until the 668-D arrives, the duty under Section 6332 continues.

The ten-year collection statute sits in the background of every levy. A continuous wage levy does not run forever on its own, but it can run a long time, and the employee's leverage usually lies in a payment arrangement rather than in waiting the IRS out. For readers who want the mechanics of that clock, our piece on how long the IRS can collect a tax debt covers the collection statute in more detail.

Why this is an owner's problem, not just a payroll task

A wage levy against one employee looks like an administrative nuisance. The statute treats it as a personal obligation of whoever in the company holds the duty to comply. That is the shape of the thesis our practice keeps returning to: a payroll compliance question is also a collection-law question, and for the owner it is a personal-liability question, all at once.

Oklahoma employers should also expect that the Oklahoma Tax Commission has its own collection tools against an employee who owes state tax, and that those run as a separate process with separate paperwork. A federal 668-W does not answer a state demand, and a state demand does not change the federal duty. Each has to be handled on its own terms.

Routine handling does not require a lawyer: date-stamp the form on receipt, hand over the statement the same day, compute from the enclosed Publication 1494, remit each pay period, and keep going until the 668-D arrives. What does call for one is the situation where the form is ambiguous, where the employee is also an owner or a creditor of the company, where a bonus plan or a deferred compensation arrangement makes the right remittance unclear, or where an officer is being asked why a prior levy was not honored. Those are the points where a short review is cheaper than a Section 6332 assessment.

If a Form 668-W has reached your payroll desk and the right handling is not obvious, we would rather look at it with you now than help unwind it later. Reach our Oklahoma City office or use the contact page on this site; a brief conversation at the front end is almost always less expensive than a liability that could have been avoided.

This article is general information about Oklahoma, Texas, and federal law, not legal advice, and it does not create an attorney-client relationship. Facts matter; talk to a lawyer about yours.