Can Creditors Get Your Income If You Are Self-Employed?

If you are an independent contractor or freelancer, a judgment creditor cannot garnish your wages. But it may be able to get some of your income through a non-earnings garnishment.

When you are self-employed, a judgment creditor may not be able to obtain a traditional wage garnishment against you. However, there is another collection method that a judgment creditor can use to get to your business income, called garnishment for property other than personal earnings or a non-earnings garnishment.

Wage Garnishments Are for Employees Only

A judgment creditor may not be able to use a traditional wage garnishment to collect from you income because you do not share a common employer-employee relationship with your client. That is because a “wage” is usually defined as compensation paid from an employer to an employee. Whether or not the compensation that you receive as a self-employed individual is subject to a wage garnishment will ultimately depend upon the laws of your state, and whether you meet your state's definition of an “employee.”

Are You an Employee or Independent Contractor?

As a general rule, the compensation you earn may not be subject to a wage garnishment if you are an independent contractor or someone other than an “employee.” The determination usually depends on how much control and independence you have on the job. Factors that may weigh in favor of you being an independent contractor, and thus not subject to wage garnishment, include some of the following:

  • You control the hours you work, where you work and how you do your job.
  • You are responsible for your own taxes and other expenses.
  • The person or company that you provide services to does not withhold taxes and other expenses from your compensation nor do they reimburse you for your tools, equipment, and supplies (such as cell phones or car allowances).
  • Your relationship with the person or company that you work for does not have other earmarks of an employer-employee relationship, such as: restrictions on having other clients, payment of employment benefits (such as insurance, vacation or pension), or performing broad or continuous services that are core to employer's business.

Common Types of Non-Employees

Common types of self-employed individuals who may not be subject to standard wage garnishments include:

  • freelancers, writers, or photographers
  • musicians, performers, painters or other artists
  • barbers, hair stylists, manicurists or masseuses
  • truck drivers, delivery persons or taxi drivers
  • commission-only based professions, such as sales agents or real estate professionals
  • doctors, attorneys, engineers, consultants or other professionals, and
  • landscapers, plumbers, repair experts or general contractors.

Non-Earnings Garnishments to Get Your Income

While the idea of being potentially garnishment-proof might seem appealing to you, do not rest easy. Judgment creditors have another way to get your income, called a “garnishment for property other than personal earnings.” It may also be called “non-earnings garnishment”.

A non-wage garnishment differs from a wage garnishment in these ways:

  • It is a one-time attachment of compensation you are supposed to receive for services rendered, such as commissions, receivables from a particular source, or a contract payment. Wage garnishments are usually continuous, with each paycheck.
  • Up to 100% of your expected compensation can be garnished. Wage garnishments are limited to no more than 25% of your disposable income under federal law, or more under your state's law.
  • Non-wage garnishments can reach your bank accounts and other property. A wage garnishment only attaches to your disposable income.

Is Any of Your Income Exempt From Collection?

Another drawback to being self-employed is that your state's laws may not consider your income as “wages” that are entitled to exemptions usually given to a traditional employee whose income is garnished.

However, even if your state's laws will not let you exempt some of your self-employment income, federal law may still provide you some relief. That is because the Consumer Credit Protection Act's definition of “earnings” may be broader than what your state might define as “wages,” and can include the income that you make as a self-employed person. This is important because, under the CCPA, a judgment creditor can only garnish the lower of:

  • 25% of your disposable earnings (gross pay less taxes and mandatory deductions), or
  • your disposable earnings less 30 times the federal minimum wage.

If you owe child support or alimony, then up to 50% or 60% of your disposable earnings are subject to garnishment under the CCPA. Your exemptions may also be reduced if you are being garnished for student loan debts or federal taxes.

State laws are not totally consistent on these issues. You should research the laws of your state to find out if it considers your self-employment earnings to be “income” for wage garnishment purposes, and whether those earnings also qualify for the same exemptions as wage garnishments. Or, talk to a local debt or bankruptcy attorney.

Operating as a Business Entity

If you own and operate your business as a separate legal entity, such as a corporation or limited liability company, additional issues can come into play.

Corporations: You May Be an Employee

If you own and operate a corporation, and are paid income through that company, then you may still be subject to a wage garnishment. That is because you are paying yourself as an employee, with the corporation being your technical employer.

LLCs:   More Protection

If you perform services as a member of an LLC, and receive compensation in the form of distributions from the LLC, then you may have even more protection than most other types of self-employed individuals. That is because in about half of the states, a judgment creditor of an individual member of an LLC usually cannot attach the LLC assets or garnish the income a member receives from the LLC. Instead, a judgment creditor must go through a special proceeding to receive what is called a “charging order.” A charging order only allows the judgment creditor to get to distributions that are actually made to you as a member. If the LLC does not pay you a distribution, then a judgment creditor takes nothing. If you are the sole owner of your LLC (called a single member LLC), you may not have the same protections.

A judgment creditor may be able to foreclose on your interest in the LLC. However, as with a charging order, a judgment creditor cannot force the LLC to make distributions. In fewer instances, the creditor may be able to force the sale of LLC, but this is a difficult process.

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