11

I am trying to budget my money for the next few months to save up money to move out. In a month, my taxable wages for the year will have crossed the bracket from 15% - sub $37450, into the 25% bracket. Does this mean I will have a 10% drop in my net paycheck? Or will I still have the same paycheck?

I am in the US, more specifically Maryland.

27

Most countries with income tax, including the USA, design their withholding system so that in straightforward cases, tax is withheld from each month's paycheck on an annualized basis: tax for a month is calculated on the assumption that you will keep earning the same monthly amount for the rest of the year, and the withholding is set so that the tax is spread evenly across the year.

Another way of putting that is that in practice you only get the tax brackets allocated proportionately throughout the year - so up till the end of August you'll only have been assigned 8/12 of the $37450 bracket, and so on.

So if your income doesn't change and your general tax affairs don't change, your paycheck also shouldn't change.

If your income is irregular or changes during the year then things can get more complicated. As other answers have noted, withholdings are calculated according to tables that normally just take into account that specific month's income.

There are various possible changes to your tax affairs that might cause the withholdings to change. For example there'd be an impact from any change in your contributions to tax advantaged things like health insurance or retirement, health or education savings. You might also use form W-4 to change your withholdings yourself.

Note that even with a regular income that doesn't change through the year, you might find yourself either owing money or being owed a refund when you file your taxes after the end of the year. It's worth making sure that your W-4 accurately records the allowances you are entitled to, to minimize or eliminate this adjustment.

  • another way to have the amount change is to make changes to pre-tax amounts such as insurance, 401K, HSA's... – mhoran_psprep Aug 28 '15 at 17:40
  • Good point, I was sort of trying to get at that with tax status, but it doesn't really cover it. – GS - Apologise to Monica Aug 28 '15 at 17:40
  • This is not true in the United States. There is no "annualized basis" or tax assumptions made at the employer. The amount withheld in a specific paycheck is a function of the taxable amount paid in that check, pay period and employee withholding. Hourly work, overtime, quarterly or annual bonuses are all reasons for variable withholding rates per check, and the withholding is based on calculations and lookup tables published by the IRS. irs.gov/pub/irs-pdf/p15.pdf – user662852 Aug 28 '15 at 19:22
  • 1
    I meant that the system is designed that way, not necessarily that an employer would need to make those assumptions directly. – GS - Apologise to Monica Aug 28 '15 at 19:25
  • 1
    @enderland I got a couple of nice refunds after mine, particularly as they gave me a "tax-free" housing allowance that they grossed up based on the monthly withholding rates :-) – GS - Apologise to Monica Aug 28 '15 at 19:49
5

If your payroll payments are the same each period, you will generally have the same net pay per period. Some things that can cause variations:

  • Your change in pretax deductions such as 401k contribution, HSA contribution
  • If you are highly paid, once you earn $118,500, you will no longer have FICA withholding, and your paycheck can increase
  • Certain state taxes can similarly phase out, or only be charged one time (eg, business privilege taxes, UI insurance premium)

If your employer puts special payments in a specific paycheck (such as a quarterly or annual bonus, or a vacation payout) this can increase the percentage held from that specific paycheck. The IRS publishes lookup tables, and your payroll system should withhold the amount in the lookup table.

If you get a raise midyear, your new payroll withholding rate may increase based on the gross pay amount.

http://www.irs.gov/pub/irs-pdf/p15.pdf

  • Social Security stops after the cap amount, which is currently $118,500 but changes for inflation -- assuming the Fed ever manages to get inflation going again, but that's a different question. Medicare continues, and above $200,000 increases (though still much less than SS). Otherwise (TTBOMK) complete and concise +1. – dave_thompson_085 Aug 29 '15 at 1:51
4

H.R. basically consults Publication 15 (this is the link to 2015) to determine how much to hold, based on filing status, exemptions, and pay amount. What's described here is a form of estimation, or, in other words, H.R. withholds what would be your actual taxes, dividing across the number of paychecks you receive. Assuming your gross pay and exemptions do not change, this usually results in a zero-sum for taxes owed (you will receive nothing, and owe nothing).

As you can see from the charts, the year is basically broken down into equal tax units that reflect how much you would owe if you worked at that bracket all year. This estimation works best when you have steady hours from check to check. In other words, your taxes are based on the estimate of what you'd make if you earned that much all year, scaled down to the time frame (e.g. 1/52 if you are paid weekly, or 1/26 if you paid biweekly). They do not go "up" near the end of the year, because they're estimated in advance. You don't move up a tax bracket, but are instead taxed at a particular bracket every paycheck.

There's also other forms of estimation mentioned there, but basically follow the same scheme. Note that all estimation forms are just that-- estimates. It's best to use a calculator and compare your current taxes whenever a significant change occurs-- a raise, a new child, getting married or divorced, etc. You'll want to be able to alter your exemptions so that enough taxes are coming out. That's also the reason for the "withhold extra" box, so that you can avoid owing.

For example, if you're making $44 a week for the first 26 weeks, and then you make $764 a week for the second 26 weeks of the year, you'll end up with an actual tax liability of $2,576.6, but end up paying only $2,345.20. You would owe $231.40. Of course, the actual math is a lot more complicated if you're an employee paid by the minute, for example, or you have a child, go to college, etc.

Paychecks that vary wildly, like $10,000 one week and $2,000 the next tend to have the hardest-to-predict estimates (e.g. jobs with big commission payouts). You should avoid living check-to-check with jobs that pay this way, because you'll probably end up owing taxes. Conversely, if you've done your estimates right and you're paid salary or exactly the same number of hours every week, you'll find that the taxes are much easier to predict and you can usually easily create a refund situation simply by having the correct exemptions on your check.

So, in summation, if your check falls in the 25% category (which is, of course, 25% above the tax bracket break point), you're already paying the correct amount, and no further drop in your check would be expected.

3

It seems that you are misunderstanding how your taxes are calculated. You seem to be under the impression that once you pass $37,450 annual income, ALL of your income will be taxed at 25%. However, in reality, only the income you earn above that amount will be taxed at 25%.

You can use this chart to determine exactly how much federal tax you will pay;

tax brackets

As you can see, if you earned, $37,500 in a year, you would only be charged 25% taxes on $50 (and you will pay 15% on the amount between $9226 and $37450, and 10% on the amount from $0 to $9225, which is $5126.25 when summed together).

  • 9
    I don't think the asker is misunderstanding that. The question is whether the $37,450 is filled up first as the year progresses, so that once they have earned the $37,450 in a year, any further income in that year - i.e. the next paycheck - will all be taxed at 25%. – GS - Apologise to Monica Aug 28 '15 at 18:22
  • 5
    Is it just me? Or does that 35% tax bracket seem kinda pointless. Did someone forget it exists or something? – corsiKa Aug 28 '15 at 18:47
  • 1
    @corsika That 35% tax bracket question is here, incidentally: money.stackexchange.com/questions/47706 – senshin Aug 28 '15 at 20:33
2

In general no, if you just have one employer and work there with the same salary for the whole year. Typically an employer does tax withholding by extrapolating your monthly income to the entire year and withholding the right amount so that at the end, what is withheld is what you owe. It's not a surprise to them when your income crosses a tax bracket threshold, because they knew how much they were paying you and knew when you would cross into another bracket, so they factored that in.

If you have multiple jobs or only worked for part of the year, or if your income varied from month to month (e.g., you got a raise) there could be a discrepancy between what is withheld and what you owe, because each employer only knows about what it's paying you, not what money you may have earned from other sources. (Even here, though, the discrepancy wouldn't be due to the tax brackets per se.) You can adjust your withholdings on form W-4 if needed, to tell the employer to withhold more or less than they otherwise would.

  • 1
    This is not true in the United States. The amount withheld per paycheck is a function of the gross payroll amount on each check. A midyear raise or a quarterly or annual bonus payment will lead to a specific amount withheld. irs.gov/pub/irs-pdf/p15.pdf – user662852 Aug 28 '15 at 19:12
-1

No, you will (generally speaking) not see a decrease in your net earnings from crossing a tax bracket:

The US utilizes a progressive tax system employing marginal tax rates divided into brackets.

This means that your highest marginal rate (the top bracket you fall into) only applies to the portion of your income that is in that bracket, not your total income. This helps ensure that your total tax burden does not increase measurably from crossing a tax bracket.

Be aware that you can still see measurable changes in your total taxes due if increases in income make you no longer eligible for certain deductions and/or benefits that were otherwise reducing your tax burden, but this is not the same as how changes in your highest marginal rate affect your overall average tax rate.

Note that when you see a rate table such as the one on efile.com's federal income tax rates page or on Wikipedia's Income tax in the United States page, the rates listed are for each segment of income, not for your overall income:

In other words the 15% rate below (for 2014, filing single) only applies to the portion of your income falling between the listed numbers, not to income below it or above it: that would be calculated under the respective rates given.

10% $1 to $9,075
15% $9,076 to $36,900
25% $36,901 to $89,350

You can use the i1040tt tax tables to gain a sense of how this works in practice:

(The linked resource is for 2014 taxes) The threshold in 2014 for the 25% rate vs 15% was $36,900.

Using the linked table, if you were single and made between 36,850 and 36,900 in gross income, your tax liability before other considerations was $5,078.

If you made between 36,900 and 36,950, your base tax liability was $5,088.

  • This doesn't address the question which is asking about whether the tax brackets are spread out across the year or not. – curiousdannii Aug 29 '15 at 0:34
  • @curiousdannii - if that's the case, you can vote down. Flags aren't appropriate for this. – JTP - Apologise to Monica Aug 29 '15 at 4:31
  • @JoeTaxpayer This site must have some strange definition of Not An Answer then... whatever doesn't matter to me. – curiousdannii Aug 29 '15 at 6:55

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.