Disposable Earnings

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What are disposable earnings? 

Disposable income refers to the income that an employee has left after paying taxes and other government-mandated payments. It is the money that an individual can either spend, save, or invest as desired.

If you convert it to a formula, it looks like this: 

Disposable Income = Personal Income - Personal Current Taxes

The taxes that are subtracted from an employee’s gross earnings are required by law. These are composed of federal, state, and local taxes that come in the form of Social Security, Medicare, income taxes, property taxes, and unemployment insurance. 

Are there still deductions that are taken from disposable earnings? 

Yes. Deductions that are not required by law are subtracted from disposable earnings. Examples of these deductions are pension plans, health and life insurance premiums, 401(k) contributions, union dues, and charitable contributions. All of these are taken from disposable earnings. 

Is there another name for disposable earnings? 

Yes, disposable earnings are alternatively called “disposable personal income” and “disposable income.”

Is disposable earnings the same as discretionary income? 

While the two terms may be confusing at first glance, they can easily be distinguished from each other. Discretionary income is disposable income minus paying for certain necessities and essentials like rent, mortgage, food, electricity, health care bills, and transportation. From this, we can say that discretionary income is always smaller than disposable income. 

Discretionary income is money that can be spent on non-essential services and “wants” like going to the movies, dining out in restaurants, vacations, and other things. Think of it as the money you can spend on all fun things. How an individual chooses to spend (or not to spend) their discretionary income is entirely up to them. 

How do disposable earnings relate to wage garnishments? 

To answer this question, let us initially define what a wage garnishment is. A wage garnishment refers to any legal order by which money is withheld from an employee’s paycheck to pay for unpaid debt. Examples of unpaid debts would be unpaid taxes and child support, among others. 

Most garnishments are made via a court order but the Internal Revenue Service (IRS) may garnish wages without one. 

The next question is where will wage garnishments be subtracted from? Wages that are eligible for garnishments include an employee’s pay plus any bonuses or commissions received. However, tips from customers are not considered part of disposable earnings so these cannot be subject to garnishment. 

The amount of pay that is subject to garnishment will be based on the employee’s disposable earnings.

What is the garnishment process? 

Not everyone who an employee owes money to can just demand their employer to withhold money from the employee’s wages. To be eligible for wage garnishment, creditors go through a process. The creditor must first file a lawsuit against an employee for nonpayment of a debt. Once the creditor wins, they can get the court’s permission to garnish the employee’s wages. 

The court will then send a notice to the concerned employee and their employer. Upon receipt, employers have the responsibility to calculate the employee’s disposable earnings accurately to withhold the correct amount of garnishment. If an employer withholds an incorrect amount or fails to withhold garnishments altogether, they can be held liable. 

Can all of an employee’s disposable earnings be garnished? 

No. Although a court can order for a portion of an employee’s paycheck to be withheld to pay for outstanding debts, the amount that can be withheld is also regulated as per the Consumer Credit Protection Act. This is to protect the employee from facing undue financial hardship due to wage garnishments. 

How much of an employee’s disposable earnings can be garnished? Are there limitations on the earnings that can be garnished?

No matter how many garnishment orders are received for the same employee, there is a maximum amount that can be garnished from disposable earnings in a pay period or workweek. Again, disposable earnings or disposable income is the money that is left after deducting government-mandated taxes. 

Calculating the amount that can be withheld depends on how much the employee’s weekly disposable income is. 

For ordinary garnishments (not for support, bankruptcy, state, federal tax):

Let’s have an example: 

The gross earnings of an employee are $263. After taking out deductions required by law, the employee’s disposable earnings amount to $233 for the week.

$233 -$217.50 = $15.50

Please take note that these limitations do not apply to the following:

Are there exceptions to the limitation on wage garnishments? 

Yes, there are. According to the wage garnishment law, the limitations on the amount of disposable earnings subject to garnishment do not apply to certain court orders on bankruptcy or to debts that are due for federal or state taxes. For instance, although the IRS must inform an employee before garnishing wages, they do not need a court order for it. 

Keep in mind that there are also separate state wage garnishment laws. If the state wage garnishment law is different, the law resulting in the lower amount of earnings garnished must be followed.

What can an employee do if wage garnishment is causing financial hardship?

If in case the wage garnishment amount withheld from an employee’s paycheck creates a financial hardship that the employee can no longer pay for basic necessities, there are several ways by which the employee can reduce the amount of wage garnishment. The employee can file a claim of exemption or file for bankruptcy which is likely to be more complicated.

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