What Is Considered Disposable Earnings?

Disposable earnings represent the portion of an individual’s income that is available for garnishment by creditors. This figure is calculated after specific legally mandated deductions are accounted for, setting it apart from an individual’s gross pay or even their take-home pay. Understanding what constitutes disposable earnings is important for anyone facing financial obligations that may lead to wage garnishment, as it dictates the maximum amount that can be legally withheld from a paycheck. This concept helps to ensure that individuals retain a minimum amount of income necessary for their living expenses, even when facing debt collection.

What Constitutes Disposable Earnings

Disposable earnings are determined by subtracting specific legally required deductions from an individual’s gross pay. These deductions include federal, state, and local income taxes.

Other mandatory deductions include Social Security (FICA) and Medicare taxes. State unemployment insurance taxes also fall into this category. Additionally, contributions to employee retirement systems that are required by law are subtracted to determine disposable earnings.

Conversely, many deductions taken from an employee’s gross pay are considered voluntary and are not subtracted when calculating disposable earnings. These voluntary deductions reflect personal choices and agreements, not legal mandates. Examples include health and life insurance premiums, contributions to retirement plans like 401(k)s or IRAs, union dues, flexible spending account (FSA) contributions, payments for payroll advances, or charitable contributions.

This distinction between mandatory and voluntary deductions ensures an individual’s ability to meet basic living needs is prioritized over elective financial arrangements during garnishment.

Applying Disposable Earnings to Garnishments

Once calculated, disposable earnings serve as the basis for determining the maximum amount that can be garnished from an individual’s wages. Federal law, the Consumer Credit Protection Act (CCPA), sets limits on how much can be withheld for most types of debt. For ordinary garnishments, such as consumer debts, the amount garnished cannot exceed the lesser of two figures: 25% of an employee’s disposable earnings, or the amount by which disposable earnings are greater than 30 times the federal minimum wage.

For example, if an individual’s weekly disposable earnings are $400, 25% would be $100. If 30 times the federal minimum wage is $217.50 ($7.25 x 30), the amount by which $400 exceeds this threshold is $182.50 ($400 – $217.50). In this scenario, the lesser amount, $100, would be the maximum allowable garnishment.

Different types of debts have varying garnishment limits that can exceed the general CCPA thresholds. For child support and alimony obligations, a higher percentage of disposable earnings can be garnished. If the individual is currently supporting another spouse or child, up to 50% of disposable earnings may be withheld; if not, this limit increases to 60%. An additional 5% may be garnished for support payments that are 12 weeks or more in arrears.

Federal student loan defaults also have specific garnishment rules, allowing up to 15% of an individual’s disposable earnings to be withheld. Unlike most other garnishments, federal student loans can sometimes be garnished without a court order. Federal tax levies operate under different regulations and do not adhere to the CCPA’s percentage limits. The exempt portion of wages from a federal tax levy is determined by the Internal Revenue Service (IRS) based on the taxpayer’s filing status, standard deductions, and number of dependents.

State-Specific Regulations

While federal law establishes baseline protections for disposable earnings, individual states have the authority to enact their own wage garnishment laws. State laws can offer greater protection to debtors than federal law, meaning they may set lower garnishment limits or designate a larger portion of disposable earnings as exempt from collection. For instance, some states might limit general garnishments to less than the federal 25% threshold or provide additional exemptions.

State laws cannot offer less protection than federal law; they can only provide more favorable terms for the individual. If a state law conflicts with federal law, the law that results in the smaller garnishment amount or greater protection for the employee applies. Therefore, individuals and employers must be aware of and comply with the specific garnishment laws in their state. These state-specific regulations can significantly impact the actual amount withheld from an employee’s pay.