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
Note that in some countries, while marginal tax rates usually apply, some benefits or tax reliefs have hard limits, and a small gain might push you over the edge of that limit resulting in a net loss of income.
Example: The Netherlands, between 28000 and 48000 EUR, net gains are incredibly small or even negative
If you’re using such benefits, ensure you’re won’t exceed your max yearly income
Taxes are made artificially complex to keep accounting companies in business. Technically, the government agencies (federal, state, and local) have all the information to do your taxes for you, then send you your finished statement for review and to add deductions.
But I digress. As others have mentioned, this is a common logic mistake. You are taxed a certain amount up to the lowest tax bracket maximum. No matter how much you make under that amount, it is all taxes the same. Once you exceed that amount, only the money above that is taxed higher.
NOW. And this is my guess as to why this myth continues to come up.
Let’s say your normal paycheck is $900/ week. That would be $46.8k per year. All of your earnings would be under the lower tax bracket and it would all be taxed the same flat rate. Now let’s say for the next month you work a ton of overtime and your check increases to $1,300/ 2 weeks. That would be $67.6k/year if you got that pay all year long.
Most payroll companies determine tax withholdings from your check based on each check * 26 weeks in order to make sure you don’t owe money at the end of the year. You may have more taxes taken out on those paychecks HOWEVER when you file your taxes with your actual annual taxable income listed, you will get the amount you overpaid back.
TLDR. Work the OT if you like. You will make more money in every situation.
Sometimes when I work extra overtime I take home less. Working 65 hours per week nets me more pay then if I were to work 70. How do taxes work on a paycheck to paycheck basis? For clarification, I get paid every two weeks
Lots of good answers here, but let me take a shot at the Eli5 version.
Yes, you get more money, but you also pay not only more tax overall, but a higher percentage of your earnings is taxed overall.
(simplified example, and not using any type of real tax code or %s)
Your normal weekly pay is $600 for 40 hours of work, with a take home of $500, meaning you paid roughly 17% in taxes total.
You work 50 hours, 10 hours of time and a half overtime, for a gross of $825, but a net of $660, paying 20% in total taxes.
You still take home more money overall, but you not only pay more in tax, but pay a higher % in tax as well.
I think the point your co-workers trying to make is this. If you make $30 an hour, say, and your overtime is double that, if you work a few extra hours, you see that money. You actually notice roughly $120 extra, sorta, if you work 2 overtime hours. But if you work 20 overtime hours you certainly won’t ‘see’ $1200 on your pay because that money he’s a fat chunk taken off because if you work 20 hours extra fairly regularly you gonna bump up a bracket and if that money was not withheld off your pay you’ll be paying out of pocket at tax time. Employer deductions work like that so your coworkers saw the gleam in your eye and your calculations you were making in your head and since they’ve all been there they just trying to warn you.
Saying ‘you don’t actually lose’ like most these people are saying doesn’t quite get the point. Work a little overtime and you’ll feel it in the wallet, work a lot of overtime and you’ll feel robbed.
Latest Answers