What Qualifies As Disposable Income When it Comes to Wage Garnishment?

A wage garnishment is the process in which an employer is legally required to withhold a specific portion of an employee's pay to satisfy a debt he owes. Under Title III of the Credit Consumer Protection Act, the employer can only garnish only a certain amount of the employee's pay. The amount of the garnishment is based on the employee's disposable income.

Qualification

Disposable income refers to the employee's pay after payroll taxes and pre-tax voluntary deductions have been withheld. Payroll taxes include federal income tax, Social Security tax, Medicare tax and, in most cases, state income tax. If city or local income tax or unemployment insurance apply, the employer must also withhold them to arrive at the disposable income. Furthermore, pre-tax deductions, such as medical insurance and traditional 401k plans are deducted before taxes are withheld, and are therefore included in the calculation of disposable income.

Once disposable income is determined, the employer subtracts the wage garnishment and after-tax voluntary benefits to arrive at the employee's take-home pay.

Deduction Limits

For an ordinary garnishment, such one that a creditor initiates, the weekly garnishment amount cannot exceed 25 percent of disposable income, or the total by which the employee's income is more than 30 times the federal minimum wage. As of July 24, 2009, the federal minimum wage is $7.25 per hour. Disposable wages that are less than $217.50 per week -- $7.25 x 30 -- are not subject to garnishment. If the disposable earnings exceed $217.50 but are less than $290 -- $7.25 X 40 -- the amount exceeding $217.50 is subject to garnishment. If the disposable wages are more than $290, a maximum of 25 percent is subject to garnishment.

Levies

The federal or state government may refer to a wage garnishment as a levy. These institutions do not need a court order to levy income. They must, however, send the debtor a bill demanding payment and a levy notice prior to enforcing the levy. The employer withholds the levy according to the agency's regulations. For example, it uses IRS Publication 1494 to determine the amount of income exempt from the levy.

Child Support Orders

Child support orders are valid only if issued by the court. The document states the amount to withhold from the employee's paycheck according to her pay frequency. Under federal law, the employer can deduct up to 50 percent of disposable income for child support if the employee is presently supporting a spouse or child excluded from the support order. Otherwise, it can withhold up to 60 percent. Furthermore, it can deduct an extra five percent for support payments over 12 weeks late.

Considerations

Wage garnishments are typically processed in the order in which they are received. The employer can withhold more than one garnishment at a time, as long as the total does not exceed 25 percent of disposable income. An exception applies to child support orders and tax levies. These garnishments take priority over all others, including federal student loans.

References

• IRS: Levy
• Social Security Administration: Determining an Employee's Disposable Pay for AWG.
• Washington State University: Garnishments
• U.S. Department of Labor: Fact Sheet #30: The Federal Wage Garnishment Law, Consumer Credit Protection Act's Title 3 (CCPA)
• Butler County Clerk: Employers' Instructions for Garnishment Procedures
• Bullivant: Wage Garnishment

Resources

• IRS: Publication 1494
• University of Minnesota: Deduction Descriptions