It seems it’s time to revisit this discussion.
A raise does not mean you’re making less money because it’s “taxed more.” The tax rate is not greater than 100%, which means each individual dollar is not taxed at a rate greater than or equal to that dollar. The highest tax rate for 2022 is 37%. So even if you’re at the highest tax bracket, you’re still bringing home 0.63 cents on the dollar. So let’s revisit the United States tax system: marginal tax brackets.
MARGINAL TAX BRACKETS
Your income is taxed by the IRS according to a marginal tax bracket. This means that each dollar fits into a separate “pot” to determine how much it’s taxed. This does not mean that if you make $15,000, it’s all taxed at 12%; or if you make $95,000, it’s all taxed at 24%. This means that each dollar that fits into these “pots” is taxed at its respective rate. For ease of seeing how the math works, this post is just going to assume you’re filing single, but there are other options, which changes the bracket amounts.
Let’s say you make $80,000, and you’re considering a raise to $95,000. This is a difference of $15,000 in gross income. Only $5,925 falls into your “new” tax bracket. Your net raise (take home pay, barring any other deductions for the year) is $11,581.50, and you’re paying $3,418.50 in additional taxes.
Let’s do an example where you receive a raise, but you stay within the same tax bracket. You’re making $80,000 and offered a 5% raise, which would bring your salary to $84,000. You would make another $3,120 in net income, and you’re paying $880 in additional taxes (which is 22% of the salary increase).
Making $90k instead of $80k does not mean that your entire pay check is now taxed at that higher rate. This is the common misconception about earning more money. Each dollar is taxed within the bracket it falls into. In 2021, single filers get taxed on 10% of their income up to $10,275. That means that the first dollars they earn are taxed at 10%, but the $10,276th dollar they earn is taxed in the next bracket, or 12%. The 12% bracket goes to $41,775. Similarly, the $41,776th dollar they earn will be taxed at 22%, and so on.
Mr. ODA posted about how bonuses are calculated by your payroll processors back in 2019. I’d rather take the additional money in my pocket than worry about how it may appear to be taxed more when you see a new paycheck.