While gross pay includes all of your taxable earnings for a pay period before any deductions, disposable income is the amount of your earnings that remain after subtracting mandatory deductions. This is not the same as net pay, which is the amount remaining after all deductions have been taken from your gross pay.
Mandatory deductions include federal, state and local income taxes, which the law requires employers to deduct. FICA, Medicare and child and/or spousal support payments ordered by the court are other examples of mandatory deductions. The Federal Insurance Contributions Act -- more commonly known as FICA -- requires that part of your pay be withheld for Social Security and Medicare. Other mandatory deductions include unemployment insurance and workers’ compensation insurance. While your employer is required by law to withhold these payroll tax deductions, he may not withhold other deductions from your paycheck unless you authorize the deduction.
Federal Insurance Contributions Act
Under the law, 12.4 percent of your earned income up to an annual limit must be paid into Social Security. In 2010, the limit was $106,800. You must pay an additional 2.9 percent into Medicare no matter how high your earned income. Wage earners and employees who receive a salary pay only half of these amounts -- 6.2 percent for Social Security and 1.45 percent for Medicare. Your employer must pay the other half. Your portion of the tax is automatically withheld from your paycheck. Self-employed individuals must pay both shares although the Internal Revenue Service allows you to deduct half of the self-employment tax as a business expense.
Other Payroll Deductions
You can have deductions taken from your pay that are not required by law. These are the deductions your employer makes after deducting taxes. Voluntary payroll deductions include employee-paid health insurance premiums, union dues, and contributions to a union pension or other retirement plan, life insurance premiums, savings bonds or premiums for short-term disability plans. Although employers often offer these benefits, you must agree to have these deductions withheld from your paycheck.
Net Disposable Income
Once your employer takes all payroll deductions -- both mandatory and voluntary -- your net disposable income is the amount of money you have left out of your earnings to pay for things like rent or mortgage, utilities, food, clothes and any other essential living expenses. Discretionary income is what is left of disposable income after you pay for these basic fundamentals. You can either save what remains or spend it on nonessentials.
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