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Simple question. If Person A makes $150,000 at their regular job (W2) and brings in $5,000 on a side job (1099-MISC), do they owe more in taxes on the $5,000 versus Person B, who earns $50,000 (W2) at their regular job?

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US income tax works this way: it is a marginal tax, i.e. the tax is calculated from each additional dollar of income, according to the following rule: there's a number of "brackets", and once you income is in certain bracket, the additional dollars are taxed according to this bracket, until you have enough income to go to higher bracket. Current brackets are, for single person:

  10%   $0 – $8,375
  15%   $8,376 – $34,000
  25%   $34,001 – $82,400
  28%   $82,401 – $171,850
  33%   $171,851 – $373,650
  35%   $373,651+

Brackets for other categories can be found online.

This means that if you earned $150000, you are in 28% bracket, and so you'll pay 28% income tax, or 1400, on additional 5000 of income. If you earned only $50000, you would be in 25% bracket, so you would pay only 1250.

In fact, it's more complicated since you can take various deductions before your income is considered for the purpose of taxation, and it can take you to different tax bracket sometimes, if you are close to the margin, so if you want to know the real tax, you better use some specialized software or talk to an accountant. But for the purpose of quick explanation, that's how it works.

  • StasM - you are right on. So long as you talk "taxable income," which you are, you get to ignore the other issues. As your chart shows, it depends where that $5K hits to determine the federal tax on it. – JoeTaxpayer Jan 23 '11 at 21:17
  • Agreed. One important point that seems to confuse people, is that unless you are in an very unusual situation, increasing your income cannot mean that you get less takehome pay. Moving from the 28% to 33% tax bracket only affects income over $171,850. – KeithB Jan 24 '11 at 15:45
  • Yes, this is in general correct (this is the "marginal" part), though with incomes in the top brackets there are some traps - you can lose right to certain deductions and credits, so there can be, in theory, a situation where even $10 of income can cost you thousands of dollars. You probably can remedy it then, though, by reducing you income back below the threshold - like donating to charity. – StasM Jan 24 '11 at 19:36
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The question presumes that the 1099 income is treated differently than the W2 income, but it is not.

Person A will owe more because they have a higher total income, regardless of whether it was 1099 or W2 income.

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