TECHNICAL GLOSSARY

Disposable Income: Definition, Calculation, and Garnishment

Disposable income refers to the portion of your earnings remaining after you have paid mandatory taxes. This amount is available to use for personal expenses, as well as for saving and spending at your discretion. Disposable income serves as one of the main indicators of the economy, as it reflects an individual’s purchasing power and ability to contribute to consumer spending.

How to Calculate Disposable Income

The formula used to calculate disposable income is as follows:
Disposable Income = Gross Income - Taxes
Where

• Gross Income refers to salaries, wages, bonuses, rental income, and any other form of income received.
• Taxes are any mandatory federal, state or local taxes as well as any contributions made to Social Security and Medicare.

Step by Step Example
Let's use the following employee as an example of how to calculate disposable income and their earnings:

• Gross Earnings: $3,000
• Federal Income Taxes: $300
• State Income Taxes: $150
• Social Security Tax (FICA): $186
• Medicare: $43.50

Now, let's step through the process of arriving at the disposable income available to this employee.
Step 1:
Take gross income ($3,000) and subtract all mandatory deductions to arrive at disposable income.
$3,000 - ($300 + $150 + $186 + $43.50) = $2,320.50
Thus, this employee has $2,320.50 in disposable income for his own personal use.
Note:
Do not subtract voluntary deductions like health insurance, retirement contributions, or union dues when calculating disposable income.

Disposable Income for Garnishment

The maximum amount allowed to be withheld from wages that are subjected to garnishment will generally be determined by the disposable income of the employee. The United States federal government has created limitations on the amount that can be garnished to protect employees from having too much taken out of their pay.

Garnishment Limitations

The total amount allowed to be withheld for wage garnishments shall be the smaller of the two amounts listed below:

• 25% of the disposable income; or
• The difference of the disposable income from thirty (30) times the us federal minimum wage.

There could be other limitations based on the type of debt to be paid, including:

• Child support or alimony
• Federal or state taxes
• Consumer debts

Following these guidelines will help ensure compliance with both Federal and State laws along with additional protection for the basic needs of an employee.