Q. (cont.) Our Vendor Maintenance team will set up whoever the employee owes money to -- this can be another individual, a law firm, or a creditor (such as medical or student loan). I understand that payments to attorneys would always be reportable under box 14. However, would payments to another individual (not the employee), or payments to the creditor be 1099-MISC reportable? If so, which income tax code would we use (MISC03 or MISC07)?
A. We had this same question come up fairly recently. At the time, I spoke with IRS information agent Ms. Morrison (ID# 1003375683), who stated that no 1099 reporting of the garnishment made to the recipient is necessary UNLESS the payments are made to an attorney. The logic here is that it is not your organization who is paying the creditors, it is the employee. You are simply passing along a part of his or her wages.
However, per Publication 17 (https://www.irs.gov/pub/irs-pdf/p17.pdf), you must report on the employee's W-2 the amounts you remitted on his or her behalf: "Garnisheed wages. If your employer uses your wages to pay your debts, or if your wages are attached or garnisheed, the full amount is constructively received by you. You must include these wages in income for the year you would have received them." Therefore, these amounts must be reflected on the PAYER's W-2 form as a deduction of after-tax dollars in boxes 1, 3 and 5, and optionally in box 14.