Employees who don't pay their debts are in danger of having their wages garnished. As they don't have employee status, independent contractors and self-employed individuals normally aren't subject to wage garnishment. However, these individuals can have bank accounts and expected business income garnished, which can be an even worse scenario.
Creditors that aren't paid back often are able to obtain a wage garnishment against individuals, and therefore receive money directly from an employee's paycheck. This takes place until the debt is repaid. The federal government requires that wage garnishments be less than 25 percent of the individual's disposable income. In this context, disposable income means gross income less taxes and other mandatory deductions.
Since 1099 contractors are not technically employees, creditors usually can't garnish their wages. However, that doesn't mean that contractors get off scot-free. According to AllLaw.com, creditors also can request a non-wage or non-earnings garnishment. Non-wage garnishments typically are a one-time withdrawal of assets from your bank account based on current account balance and expected business income.
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Limits on Non-Wage Garnishments
While federal and state regulations govern how much in wages can be garnished, the protections aren't as robust for non-wage garnishment. Unlike wage garnishments, filing bankruptcy doesn't necessarily stop a non-wage garnishment. This varies by location. Some states consider self-employment income to be the same as wages for garnishment purposes and limit the amount that can be garnished. In other states, there's no legal restriction on how large the levy can be.
Some 1099 contractors may have a separate business bank account for their sole proprietorship or partnership. However, these business bank accounts are not necessarily outside of the reach of a garnishment. Since these businesses are not separate legal entities, the accounts still belong to you as the taxpayer and can be garnished for your personal debts. However, creditors will have a harder time accessing business bank accounts if you own a C corporation or an LLC.