Glossary of Human Resources Management and Employee Benefit Terms
Disposable earnings are the income an employee receives after taxes and payment obligations have been met that can be spent or invested as they desire. Some deductions, such as taxes and Social Security, are legally mandated and do not count towards an employee’s disposable earnings.
Deductions for an employee savings plan, a pension plan, life insurance. and medical insurance are not required by law and are included as part of your disposable earnings. The distinction between different types of deductions means that disposable earnings and take-home pay are not considered to be the same.
Disposable earnings can also be defined as the portion of an employee’s income that is eligible for wage garnishments. An employee’s disposable earnings are considered to be your gross income minus any legally required deductions such as taxes and Social Security. The remaining income is eligible for wage garnishments and is considered disposable earnings.
If an employee contributes to medical insurance, savings, life insurance, and retirement accounts, they may consider adjusting the amount of their contributions in the event of wage garnishment to increase their take-home pay and reduce any financial strain.
While taxes and legally required deductions don’t count towards disposable earnings, any voluntary deductions do count. Wages that are eligible for garnishments include any normal pay as well as any commissions or bonuses an employee may receive. Tips from customers usually don’t count towards your disposable earnings and therefore cannot be garnished. Subtracting legally required deductions will give an employee the amount of their income that is eligible for garnishment.
As we’ve already established, an employee’s disposable earnings are the pay they receive after legal deductions have been paid. If the law dictates that any retirement or pension funds must be deducted, those deductions also do not count towards disposable earnings.
Calculating disposable earnings is very important for employers because they are responsible for withholding the correct amount in the event that any wages are garnished. Employers who fail to withhold garnishments, or who withhold the incorrect amount, may be held liable.
Courts can order part of an employee’s income to be withheld to repay outstanding debts. This is referred to as a wage garnishment. The Consumer Credit Protection Act limits the amount of money that can be garnished from your wages and protects an employee from facing undue financial hardships due to wage garnishments.
There are also limits on who can garnish an employee’s wages. In order to garnish wages, creditors must go through a process that first includes filing a lawsuit against an employee. The creditor must then win a judgment of the lawsuit and if the employee fails to abide by the terms of the lawsuit, the creditor can then get permission from the court to access their paycheck and garnish their wages.
Once the court has mandated the garnishment, employers are required to withhold the requested amount and send the garnishments directly to the creditor for payment. If you’re wondering, “is wage garnishment every paycheck?” the answer is yes. An employee’s wages are garnished from every paycheck until their debt has been repaid. However, they may choose to send additional payments to pay off the debt more quickly.
As well as going through a court-mandated process, creditor wage garnishments also have limits on how much they can garnish. So, how do you calculate disposable income for garnishment? The maximum amount that can be garnished is either equal to 25% of an employee’s disposable earnings (if the earnings amount to more than $290) or the amount of their earnings that are greater than 30 times the amount of the federal minimum wage—whichever is less.
However, different states may establish greater limits on how much an employee’s wages can be garnished. For example, Massachusetts sets a 15% limit on wage garnishments for most creditors.
Wage garnishment limits do have some exceptions that don’t require a judgment first. For example, the IRS must notify an employee before garnishing wages, but they do not need to have a judgment before doing so. Bankruptcy court orders are also exempt from going through the traditional process to garnish wages.
In general, federal agencies and education have a 15% limit on wage garnishments. However, limits on child support can be as high as 50%-60%. Keep in mind that different states have different garnishment limits and that while these creditors may not require a judgment against the debtor, they are required to notify your employees before garnishing wages.
If the amount of wage garnishments taken from your paycheck creates a financial hardship, an employee may file a claim of exemption. A claim of exemption is used to reduce the amount of their wages that are garnished. Alternatively, they may pursue bankruptcy as a way to discharge some of your debt. Keep in mind that bankruptcy will not discharge responsibility for student loan debt, some kinds of tax debts, and child support payments.
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