Employer skipped payments, should I allow them to defer payment until Jan 2017?

Question

Recently my employer failed to pay me for 3 consecutive pay periods. This is being corrected but they do not want to cut a check but instead provide one lump sum along with January's first payment. They assure the total amount and withholding will equal out to be the same as being paid normally in the end. My concern is with tax brackets and the idea that moving these payments into the next year will push me into the next tax bracket. Or, it will save me from being pushed into it this year. I don't know what the official tax brackets for 2016 are or if they are even known yet so I'm going with the number $91,150 being the line between brackets I need to worry about based on what I found online.

I live and work in Washington state which has no state income tax. I have rental income of about $700/month average. I also pay mortgage on that home and claim the interest on taxes. I file single and have no dependents. My estimated salary total, if I was paid correctly, in 2016 would be about $87,780 gross. The amount in question is about $11,070 gross so that would reduce my 2016 salary to $76,710 but increase my 2017 salary.

So, in short I'm dumb and don't understand tax brackets. Am I right to be concerned? My thought is that if I received payment in 2016 that would put me well into the next tax bracket for 2016 taxes. However, allowing payment to happen in 2017 may put me in a lower one for 2016 but for sure be in a higher one in 2017. Is this understanding correct?

edit because I can't comment What does the $5,183.75 number mean in the tax bracket? Where did you get a deduction of $10,350?

Answer 1

First, let's look at the tax brackets for single taxpayers in 2016:

Taxable Income	Tax Rate
$0—$9,275	10%
$9,276—$37,650	$927.50 plus 15% of the amount over $9,275
$37,651—$91,150	$5,183.75 plus 25% of the amount over $37,650
$91,151—$190,150	$18,558.75 plus 28% of the amount over $91,150
$190,151—$ 413,350	$46,278.75 plus 33% of the amount over $190,150
$413,351—$415,050	$119,934.75 plus 35% of the amount over $413,350
$415,051 or more	$120,529.75 plus 39.6% of the amount over $415,050

The cutoff between the 25% and 28% tax bracket is $91,150. You said that your gross is $87,780. This will be reduced by deductions and exemptions (at least $10,350). Your rental income will increase your income, but it is offset in part by your rental business expenses.

For this year, you will almost certainly be in the 25% bracket, whether or not you receive your backpay this year. Next year, if you receive your backpay then and your salary is $11k higher, I'm guessing you'll be close to the edge.

It is important to remember that the tax brackets are marginal. This means that when you move up to the next tax bracket, it is only the amount of income that puts you over the top that is taxed at the higher rate. (You can see this in the chart above.) So if, for example, your taxable income ends up being $91,160, you'll be in the 28% tax bracket, but only $10 of your income will be taxed at 28%. The rest will be taxed at 25% or lower. As a result, this probably isn't worth worrying about too much.

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A bit more explanation, requested by the OP:

Here is how to understand the numbers in the tax bracket chart. Let's take a look at the second line, $9,276-$37,650. The tax rate is explained as "$927.50 plus 15% of the amount over $9,275." The first $9,275 of your taxable income is taxed at a 10% rate. So if your total taxable income falls between $9,276 and $37,650, the first $9,275 is taxed at 10% (a tax of $927.50) and the amount over $9,275 is taxed at 15%. On each line of the chart, the amount of tax from all the previous brackets is carried down, so you don't have to calculate it.

When I said that you have at least $10,350 in deductions and exemptions, I got that number from the standard deduction and the personal exemption amount. For 2016, the standard deduction for single taxpayers is $6,300. (If you itemize your deductions, you might be able to deduct more.) Personal exemptions for 2016 are at $4,050 per person. That means you get to reduce your taxable income by $4,050 for each person in your household. Since you are single with no dependents, your standard deduction plus the personal exemption for yourself will result in a reduction of at least $10,350 on your taxable income.*

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* Update: Beginning in Tax Year 2018, standard deductions were increased, and personal exemptions were eliminated. In Tax Year 2018, the standard deduction for a single taxpayer such as the OP was $12,000 with no extra amount for personal exemptions.

Answer 2

TL;DR: The difference is $230.

Just for fun, and to illustrate how brackets work, let's look at the differences you could see from changing when you're paid based on the tax bracket information that Ben Miller provided.

If you're paid $87,780 each year, then each year you'll pay $17,716 for a total of $35,432:
$5,183 + $12,532 (25% of $50,130 (the amount over $37,650))

If you were paid nothing one year and then double salary ($175,560) the next, you'd pay $0 the first year and $42,193 the next:
$18,558 + $23,634 (28% of $84,410 (the amount over $91,150))

So the maximum difference you'd see from shifting when you're paid is $6,761 total, $3,380 per year, or about 4% of your average annual salary.

In your particular case, you'd either be paying $35,432 total, or $14,948 followed by $20,714 for $35,662 total, a difference of $230 total, $115 per year, less than 1% of average annual salary:
$5,183 + $9,765 (25% of $39,060 (the amount $87,780 - $11,070 is over $37,650))
$18,558 + $2,156 (28% of $7,700 (the amount $87,780 + $11,070 is over $91,150))