In a recent article on CNN.com, Career Builder provides information regarding the "dangers" of a larger paycheck. The article assumes a pay raise may place a worker in a higher marginal tax bracket, resulting in lower take-home pay. Have no fear; a pay raise will not result in lower net earnings. From the CNN/Career Builder article: Potential backfire No. 2: The more money you make, the more money you lose Let's say you earn $85,000 annually and you received a raise that brought you up to $90,000. Sounds exciting at first — until you the do the math and realize your new check is only a couple hundred dollars more than your old one. One of the negatives to earning a high salary is that your marginal tax rate is higher than other people's. While you might be earning more than your co-worker, he or she might be taking home a similar — or higher — amount per check because they aren't taxed as much. Income taxes are complicated, but using the CNN example may clear things up. Calculating the federal income tax burden requires a few steps. Each taxpayer is charged different rates on different levels of their income. A taxable income of $90,000 falls into the 28% marginal tax bracket for a single filer. The worker pays 10% on the first $7,825 earned, then increasing percentages on the income made within each bracket. A simple calculation using the tax table below yields the following tax bill: Taxable income = $85,000 Income tax = $15,698.75 +$2,212 (28% of the amount over $77,100) Income tax = $17,910.75 Take-home pay = $67,089.25 (effective tax rate of 21.07%) Taxable income = $90,000 Income tax = $15,698.75 +$3,612 (28% of the amount over $77,100) Income tax = $19,310.75 Take-home pay = $70,689.25 (effective tax rate of 21.46%) Effective tax rates measure the tax bill as a percentage of taxable income. This employee's effective rate increases, meaning more income went towards taxes, but their net pay certainly increases as well. If taxable income is over– But not over– The tax is: $0 $7,825 10% of the amount over $0 $7,825 $31,850 $782.50 plus 15% of the amount over 7,825 $31,850 $77,100 $4,386.25 plus 25% of the amount over 31,850 $77,100 $160,850 $15,698.75 plus 28% of the amount over 77,100 $160,850 $349,700 $39,148.75 plus 33% of the amount over 160,850 $349,700 no limit $101,469.25 plus 35% of the amount over 349,700 Making less money is not advantageous under the marginal tax bracket system. See the different income tax brackets here.
