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