I usually opt to work more during the holiday season because we get higher wages (holiday pay). I signed up for a lot of extra days and my co-workers keep telling me that because I’ll make more money, I’ll get taxed more. So I’ll be receiving less pay than I’d usually make without the overtime. Is that right? I feel stupid right now.
In: Mathematics
no it’s not true. you do get taxed higher the more you make but it’s not taxed so much more that you’ll make less than non overtime/holiday pay. you might have more taxes withheld with holiday pay/over time pay etc. but when you do your taxes, you’ll get that back.
General rule is if your paying more tax your earning more money. You pay more tax because your paid more
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That doesn’t make any sense.
There is no point where the tax rate goes over 100% – you will never pay more than what you earn.
No, the way taxes work in the US (and pretty much everywhere because the alternative is stupid and bad for everyone) is that when you earn more, you take home more after taxes. You may pay a higher rate on the overtime pay, depending on how much you make, but you will never take home less.
Aside from just not understanding how taxes work, the only reason to think this might be if your job does a bad job of managing your tax withholding and withhold too much. (They may, for example, withhold as if you would earn that holiday extra all year.) But you can tell them not to, and either way you’ll just have s bigger tax refund if they withhold too much.
Tax rates are like buckets. You put your first thousand of income in the first bucket and 10% gets taken out for taxes. You put your second thousand in the next bucket and 15% gets taken out. You put your next thousand in a third bucket and 20% gets taken out, and so on. So the more you work the more buckets you fill.
The later buckets get more taken out but you still have all your earlier buckets.
Yes (to your title question of “do I still get more money even though I’m taxed more?”).
Lets compare you (working more) to your coworker (working less):
– You and your coworker *both* get taxed at lets just say 15% on the first $50,000 you earn – you both pay $7500 in taxes so you bring home $42,500.
– You work overtime throughout the year and earn an *additional* $10,000, now because your total income went over $50k, you go up to the next tax bracket – **however, this bracket only affects money earned beyond that $50k**. So you pay 20% on the extra $10,000 earned – or $2,000 meaning you bring home an additional $8,000.
In the above scenario, the extra $10k you earned caused your *tax bracket* to go up, **however, it does not affect what you would’ve paid in taxes if you didn’t work any overtime**. So your total take-home pay is the $42,500 you would’ve normally had, **plus** an additional $8,000 you earned in overtime (for the above scenario), for $50,500 total vs the $42,500 your coworker brought home.
So yes, your tax bracket went up but brackets **only affect the money you earn after reaching each bracket**.
Under just about no situation in the US would there be an effective 100% tax bracket
However, generally, because that one check will be larger, payroll withholdings will withhold tax at a slightly higher rate, often assuming that one check is indicative of your typical earnings (and thus generating a larger tax refund)
In other words, you might make $100 more, but you might be taxed $11 on it despite your previous $100 of income only being taxed $10.50.
This is a common misunderstanding. Others have explained in dollars what the difference is, but just to give you an overview, people often misunderstand the difference between marginal tax rate and a flat tax rate. Flat tax would tax you the same percentage regardless of what the amount is. That’s what your coworkers think taxes do. They don’t. We have a marginal tax rate, where you’re taxed a certain percent for the first $50,000(or whatever the amount is, I don’t know off the top of my head), and then a different percent for amounts over $50,000. And then perhaps a different percent for all earnings above $400,000, things like that.
You’ll keep more money by taking the overtime. If you get into the next tax bracket, then *only the money above the first bracket* gets taxed at the higher rate. That way, you’ll never keep less of your wages just by earning more money.
For example (not using real tax rates)…
When you earn $10 you might get to keep $9 of it.
If you earned an extra $10, you might only get to keep $8 of that.
So if you earned $20, then you’d get to keep 9+8 = $17.
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