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Disposable earnings

What are disposable earnings?

Disposable earnings, also known as disposable income, are the income an employee receives after mandatory taxes and payment obligations have been deducted from their gross earnings. It indicates how much money the employee has left her to spend or invest. Certain deductions like taxes and Social Security are an employee’s legal obligations and do not count towards their disposable earnings. 

When deductions are made for the employee’s saving plan, a pension plan, life insurance and medical insurance - these aren’t legally required by the law and are included as part of the employee’s disposable earnings. 

Are disposable earning the same as discretionary income?

An employee’s disposable income tales into account the amount needed for necessary living expenses, such as food, clothing, and housing, and measures the available money for non-essential items. 

Whereas discretionary income is a measure taken by economists to determine the average spending and saving rates of a household. This measure, however, cannot fully determine the employee’s spending habits. 

How is disposable income calculated?

One can calculate disposable earnings by subtracting the mandatory deductions from the employee’s gross earnings. Legal deductions include Social Security, state income tax, federal income tax. 

Health benefit deductions, 401(k) contributions and assignments such as child support, are excluded from the calculation. 

What are disposable earnings for garnishments? 

Employee earnings that are eligible for garnishments include any normal pay as well as any commissions or bonuses they may receive. The amount of income that remains after legally required deductions is eligible for garnishment.