Updated: February 21, 2025
Disposable earnings definition and meaning
Disposable earnings are the portion of an employee’s earnings that remains after deductions required by law (e.g., taxes) are subtracted. They determine the amount of an employee’s pay that is subject to a garnishment, attachment, or child support withholding order.
Non-mandated deductions that employees choose to enroll in, such as health insurance and retirement contributions, are not included when calculating disposable earnings. Instead, disposable earnings solely account for mandatory deductions that employers must make in order to comply with laws.
What are the required deductions in disposable earnings calculations?
The most common mandatory deductions that employers need to consider when calculating an employee’s disposable earnings, include:
- Income tax on a federal, state, and local level
- Medicare tax
- Social Security
- Unemployment
- Workers’ compensation
- Disability tax
- State-required payments for state-based retirement programs
Since each state and local municipality has its own laws and regulations regarding which deductions are required, it’s important for employers to become familiar with them. An employer in California, for example, may have to follow different tax laws than an employer in Michigan.
What are disposable earnings for wage garnishments?
Wage garnishment is a legal process in which the court requires an employer to withhold some of an employee’s earnings so they can repay a debt. It’s highly regulated and may involve the following types of debts:
- Child support: Child support is typically paid by one parent to another legal parent to guardian to assist with the cost of raising a child.
- Bankruptcy court orders: These include payments related to bankruptcy settlements.
- Unpaid taxes: Wages can be garnished for federal and state taxes that have not been paid.
- Other debts: Customer debts, such as personal loans may also be eligible for wage garnishments in some situations.
To calculate disposable earnings for wage garnishments, employers must determine an employee’s gross earnings and deduct their mandatory deductions. Then, they’ll need to apply the garnishment limits based on the type of debt involved.
Is there a limit to how much wages employees can garnish?
Title III of the Consumer Credit Protection Act places a cap on the amount that an employer may legally garnish from an employee’s disposable earnings. It usually restricts garnishment to no more than 25% of disposable earnings per week, or the rate by which weekly disposable earnings exceed 30 times the federal minimum wage, whichever is less.
What is the difference between disposable income and disposable wages?
Disposable income refers to the money left over in an employee’s paycheck after all legally required obligations have been deducted. Disposable wages, on the other hand, are the amount left over after all legally required and optional deductions for items like health insurance and retirement have been made.
How do employers calculate employee disposable earnings?
It’s important to calculate disposable earnings with accuracy to ensure employees get paid properly and avoid legal issues. To calculate disposable earnings, employers should follow these steps.
- Add up gross income: This includes all types of compensation, including wages, salaries, and bonuses.
- Subtract required deductions: These are mandated by law and may include taxes, Social Security, and mandatory payments, like court-ordered child support.
The result of this calculation equates to an employee’s disposable earnings and is available for them to take home and use in any way they’d like. Let’s say an employee earns a weekly gross income of $2,000. If $600 is subtracted for legally required deductions, their disposal earnings would be $1,400.
Using disposable earnings in a sentence
“It never occurred to me how much the mandatory deductions my employer has to make would affect my disposable earnings, and I’m hoping for a raise in the new year.”
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