Disposable earnings, also known as disposable personal income, is a measure of a person’s ability to manage essential household costs after mandatory taxes have been deducted from gross earnings. It indicates how much money the employee has left over to spend or invest.
Disposable income reflects the financial status of an individual or household and their ability to pay for essential commodities. Negative disposable income shows that the individual is borrowing money to keep up with basic expenses.
The average disposable income of a country is an indicator of its economic health. Healthy spending due to higher disposable income is beneficial, while a spending cutback can indicate economic trouble.
Disposable income vs. Discretionary income
Disposable income is different from discretionary income in that the latter also takes into account the amount needed for necessary living expenses, such as food, clothing, and housing, and measures the available money for non-essential items (vacations, etc).
Discretionary income is measured by economists to determine the average spending and saving rates of households. However, spending habits cannot be fully gauged, given that actual spending depends on an individual’s willingness to take on debt for making essential and non-essential purchases.
How is disposable income calculated?
Disposable income is calculated by subtracting required deductions from gross earnings. The lawful deductions include Social Security, state income tax, federal income tax, and state disability insurance. Health benefit deductions, 401(k) contributions and assignments of support, such as child support, are excluded from the calculation.
How employers use calculations of disposable earnings
Disposable income comes into play when calculating the maximum percentage of an employee’s income that can be deducted for payroll wage garnishment. This maximum amount is the lesser of 25 percent of his/her weekly disposable earnings, or the amount by which disposable income exceeds 30 times the employee’s minimum wage. Good online payroll options are available for employees to help with this. For more information, refer to the U.S. Dept. of Labor.