Disposable Earnings: 3 Steps to Calculate for Employees (2024)

What Are Disposable Earnings?

Disposable earnings is the money left over in an employee's paycheck after legally required tax and payment obligations have been met. It's the money available to be spent according to your employee's desires and needs. Your employees may come to you inquiring about disposable earnings for a number of reasons.Maybe Christmas is coming, and they need to calculate disposable earnings on their bonus. Perhaps they received a court order that there is going to be a garnishment (money taken from their paycheck to satisfy a debt) of their wages, and they want to know more about this. No matter the reason, it’s good to understand and be able to share your knowledge on disposable earnings.

Disposable Earnings vs. Disposable Income

To appreciate the difference between disposable earnings and disposable income, let's break down what happens to an employee's gross pay.

• Gross pay is what the employee earned that pay period.
• First, involuntary deductions like taxes are withheld. What's left are disposable earnings.
• Next, voluntary deductions come out, such as 401(k) or health insurance premiums.
• What's left is disposable income, and that’s the amount you can encourage your employees to budget accordingly.

How to Calculate an Employee’s Disposable Earnings

Now that you understand what an employee’s disposable earnings are, let’s provide you with a way to calculate this for your employees. Note: this is not the precise calculation your payroll department would use. Here, we're envisioning an accurate estimate to answer an employee's questions.

Step 1: Establish Gross Income

Gross income can vary for your employees if they are working in an hourly position or a role that is salaried but provides commissions or regular bonuses. So the first step to qualifying disposable earnings is to establish, to the best of your abilities, the gross income. Perhaps this is a general amount based on the hours they worked and the amount they earn hourly, or a general idea of what their commission will be on this paycheck. You’re just looking for an approximate amount to start with here before you move on to the next step.

Step 2: Verify Taxes Withheld

Once you have gross income, it’s time to calculate how much is deducted for taxes. Taxes are established by the formula created by the IRS and agreed upon by your employee when they filled out their W-4 form. Determine the amount deducted for their legally required taxes, including applicable state and local taxes.

Step 3: Create The Formula

Once you are armed with your employee’s gross wages and applicable taxes, you’re ready to plug them into the formula. Gross income - taxes withheld = disposable earnings For example, if your employee earns $2,000 gross income and $500 is withheld for taxes, the formula would read: $2,000- $500 = $1,500 disposable earnings.

How Do Disposable Earnings Relate to Wage Garnishments?

All disposable earnings are subject to wage garnishment, so let’s evaluate what that means for employees.

Income

Garnishments are taken from your employee’s income after taxes are withheld: their disposable earnings.

Bonus and Commission

While your organization may not include bonuses and commissions as income for purposes of your 401(k) plan, or pay them through separate checks, bonuses and commissions still qualify for garnishment. This is important to explain to your employees, as they need to understand that this money is not “set apart” or “safe” from garnishments that may come their way.

Tips Are Also Included

Tips from customers are not excluded from disposable earnings and therefore are subject to wage garnishment. Tips should be claimed by the employee in all instances. The IRS is clear that tips are wages that must be reported so that they are taxed, and therefore they can be garnished.

How Much Can Be Garnished from an Employee’s Paycheck?

Defined Earnings

The DOL defines earnings as “Compensation paid or payable for personal services, including wages, salaries, commissions, bonuses, and periodic payments from a pension or retirement program or from an employment-based disability plan.” With this definition in mind, all earnings fall under this umbrella and are subject to wage garnishments.

Limits on How Much Can Be Garnished

Thankfully, there are legally mandated limitations on how much can be garnished from your employees' disposable earnings. The weekly amount to be garnished cannot exceed the lesser of the following:

• 25% of the employee’s disposable earnings or
• The amount at which an employee’s disposable earnings are greater than 30 times the federal minimum wage (meaning the current minimum wage hourly rate x 30).

The DOL fact sheet provides an example to further explain these earnings:

• If your employees' gross pay is $263 in one week and their disposable earnings come out to be $233, only $15.50 may be garnished. Only the amount over the amount set by Title III, $217.50, may be garnished where the weekly disposable earnings are less than $290.

Limits Garnishable Child Support and Alimony Amounts

Title III also limits the amount of disposable earnings that can be garnished for child support or alimony. This specifically reads that up to 50% of the worker's disposable earnings are eligible to be garnished if the worker is supporting another spouse or child, but if they are not, then the limit is 60%. Further, if the payments are more than 12 weeks behind, an additional 5% can be withheld from the employee's disposable earnings.

Protects Against Termination

The law protects employees from termination because their wages are being garnished. It doesn’t matter if your employee has multiple garnishments or levies on their wages; you’re not able to terminate employment because of this. That does not mean you cannot terminate an employee with a garnishment, but the termination must be due to company violations, not the garnishment.

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