What Are Disposable Earnings? Definition and Overview
Disposable earnings represent the portion of an employee’s wages that remain after all legally required deductions, such as taxes, have been taken out. This figure is used to determine how much of an employee’s pay can be withheld through processes like wage garnishment, attachments, or child support orders.
Understanding What’s Included in Disposable Earnings
Only mandatory deductions—those an employer is required by law to withhold—are used to calculate disposable earnings. Voluntary deductions, such as contributions to retirement accounts or health plans chosen by the employee, are not factored into the calculation.
Common Legally Required Deductions
When calculating disposable earnings, employers should deduct only those items required by federal, state, or local laws. These usually include:
- Federal, state, and local income taxes
- Medicare taxes
- Social Security contributions
- State-mandated unemployment insurance
- Workers’ compensation premiums
- Disability insurance (where applicable)
- Contributions to state-run retirement programs, if mandated
Since tax and deduction requirements vary from state to state, companies using platforms like Beyond should stay current with their local regulations to remain compliant.
Disposable Earnings in the Context of Wage Garnishment
Wage garnishment occurs when a court or government agency orders an employer to withhold a portion of an employee’s earnings to cover a debt. This process can apply to:
- Child support obligations
- Bankruptcy repayments
- Overdue taxes (federal or state)
- Consumer debt or judgments from personal loans
To determine how much can be garnished, employers must first calculate the employee’s gross pay, subtract mandatory deductions, and then apply any garnishment limits specific to the debt type.
How Much Can Be Garnished?
Under Title III of the Consumer Credit Protection Act (CCPA), there are federal limits on wage garnishments. Typically, no more than 25% of disposable earnings per week may be garnished or the amount by which disposable earnings exceed 30 times the federal minimum wage, whichever is lower.
Disposable Income vs. Disposable Wages: What’s the Difference?
While the two terms sound similar, they’re used in slightly different contexts:
- Disposable income is what’s left after mandatory deductions only.
- Disposable wages refer to the remaining amount after both required and voluntary deductions (e.g., 401(k) contributions or health insurance premiums).
How to Accurately Calculate Disposable Earnings
For payroll compliance and employee trust, it’s essential that employers calculate disposable earnings correctly. Here’s a basic step-by-step guide:
- Determine gross pay: Include salary, wages, overtime, commissions, and bonuses.
- Deduct mandatory withholdings: Subtract only those deductions required by law (like federal income tax, Social Security, etc.).
The remainder is the employee’s disposable earnings.
Example:
If an employee’s gross weekly pay is $2,000 and they have $600 in required deductions, then their disposable earnings equal $1,400.