The federal wage garnishment law states that for the purpose of wage garnishment, disposable earnings is the amount of money you have left after subtracting deductions required by federal, state and local laws from your paycheck. The amount of money a creditor may legally garnish from your income is a percentage of your disposable earnings. Note that disposable income is not the same as your net pay. Voluntary deductions such as health insurance and company retirement plan contributions are considered part of your disposable earnings.
Understand the Definition of Earnings
To calculate disposable earnings, you must first understand what is considered earnings. The federal wage garnishment law defines earnings as the amount of pay you earned by working. On your pay summary, this is reflected as gross earnings.
Your earnings may include more than just your hourly wage or salary. It also reflects any bonuses or commissions you earned during the pay period.
Money you receive from a pension or retirement program also is considered earnings under the federal wage garnishment law.
Identify Your Mandatory Deductions
Your employer is required by law to deduct certain taxes from your earnings. These deductions include:
- Federal income tax
- Medicare tax
- Social Security tax
- State income tax
- Local taxes
Residents in 43 states are required by law to pay state income taxes, which must be deducted from earnings. Seven states do not have income tax. They include Alaska, Florida, Nevada, Texas, South Dakota, Washington and Wyoming.
Tennessee and New Hampshire state income taxes only apply to dividend and interest income; wages and pension income aren't taxed by those states
Laws in some local communities include mandatory taxes on earnings; check with your city or town or ask your company's human resources office to see what, if any, local withholdings apply.
Calculate Disposable Earnings
Disposable earnings refers to the amount of earnings left over after mandatory federal, state and local deductions.
Disposable earnings is not necessarily the same as your take-home pay. Deductions from your paycheck may include additional items such as health insurance, retirement plan contributions and health savings accounts. These deductions are voluntary, not mandatory.
To calculate your disposable earnings, subtract federal, Medicare and Social Security taxes from your gross earnings. Subtract applicable state and local taxes. The resulting amount is your disposable earnings.
Know Federal Garnishment Limits
The federal wage garnishment law restricts the amount of money a creditor may garnish from your disposable earnings. In many cases, the maximum amount is 25 percent of disposable earnings.
The law puts a ceiling on the amount subject to garnishment. Those with very high incomes may be garnished on the amount of disposable earnings in excess of 30 times the federal minimum wage, or 25 percent -- whichever is less.
Court-ordered child support, bankruptcy debts, and federal and state tax debts are subject to garnishment up to 65 percent of disposable earnings.