Question about tax deducted from paycheck

[jerichoholicninja]

I was going through my paystubs because a coworker had said he had not been paid for some hours to check to see if I hadn't been paid either. (No this isn't the same place I last worked at where I had to threaten legal action to get paid.) Looks like all my hours are accounted for but, because it's who I am, I created a spreadsheet and made all sorts of fancy/pointless calculations including how much is being taken due to taxes. I thought the percentage would be the same for each check it's all over the place from 8.65% to 19.45%. It looks like the bigger the check, the bigger the percentage, but that's not the case for all of them. I know the more you make the higher your tax rate but the difference is only a couple hundred dollars a check at most. Is this correct?

[Patrick425]

It sounds like your pay from week to week or paycheck to paycheck varies alot. Each paycheck you are basically taxed on your "predicted" year end tax bracket. The current marginal rates are 10% up to about $9,000, 15% from $9,000 to $37,000, 25% from $37,000 to $90,000 and so on (all these numbers are rounded). When you get taxed on your paycheck, they don't take out 10% the first part of the year and then 15% later when your total pay goes over $9,000 and so on. Instead they "predict" what your year end taxes will be based on your YTD pay and prorate it along your paycheck. Example:

 

Assuming you get paid every other week:

- First paycheck is $307. This would amount to about $8,000 annually, so you would be taxed at 10%. (not taking into account personal exemptions which would lower your taxes).

- Next paycheck is $550. Now your predicted annual pay (based on your total pay year to date) is $11,141. So now they are going to prorate the taxes on your check. Part of your check (about $444) will be taxed at 10% and the remainder (about $106) will be taxed at 15%.

 

So yes, if your pay fluctuates alot from paycheck to paycheck, the tax rates are going to fluctuate as well.

 

Edit: Also, another question is if you are basing the percentage on your gross pay. Some deductions on paychecks are done before taxes (Employee tax deferred payments to a retirement plan, payments to an HSA account or for health premiums, etc). These deductions should be subtracted from gross pay before calculating your tax rate for an individual paycheck. If some of these deductions are not present on every paycheck that could cause fluctuations as well.

[jerichoholicninja]

I think I get the gist of it. Sounds quite unnecessarily complicated but it's the government so what do you expect?

[temke]

It could also be different on how the wages are paid out. "Bonus" payments can be taxed at a higher rate. I get a payment for opting out of health insurance and it is always taxed higher than my regular wages.

[Invader3K]

I had the same problem when I worked in a retail sales job years ago. Every other week, our check would include a factored in "team bonus" (ie. commissions) for hitting certain goals and metrics. We would get taxed at a higher rate than our normal paycheck that was based simply on our hourly wage. It was frustrating, but not much you can do about it. You may want to evaluate your withholdings if you get a large refund at the end of the year, as that means you are having too much in taxes taken out.

[Patrick425]

Generally employers will tax bonuses at a higher rate to prevent a tax "surprise" to employees when they are doing their taxes. This is especially true if the bonus is at the end of the year and the employees are salaried or make a steady wage throughout the year. Tax systems generally do not take this unknown year end bonus into account when calculating taxes throughout the year, so essentially all of the bonus is tacked on to the "predicted" annual pay that was used for all paychecks up to that point and should be taxed at the taxpayers highest tax bracket.

[jerichoholicninja]

In theory, the percentage that goes to taxes should somewhat stabilize as the year goes on right?

[Patrick425]

In theory, the percentage that goes to taxes should somewhat stabilize as the year goes on right?

 

Yes, it should, unless your pay varies wildly from paycheck to paycheck.

[Baldkin]

In theory, the percentage that goes to taxes should somewhat stabilize as the year goes on right?

 

If you have steady paychecks for the same approximate amount, it will stabilize. If your paychecks vary quite a bit (even by a couple hundred bucks) you may get those big swings still. It's based on predicted income for the year on a per check basis (check amount x26, if you're paid bi weekly) not total annual income so far divided by the remaining weeks and retroactively calculated for your approximate tax bracket.

[Patrick425]

In theory, the percentage that goes to taxes should somewhat stabilize as the year goes on right?

 

If you have steady paychecks for the same approximate amount, it will stabilize. If your paychecks vary quite a bit (even by a couple hundred bucks) you may get those big swings still. It's based on predicted income for the year on a per check basis (check amount x26, if you're paid bi weekly) not total annual income so far divided by the remaining weeks and retroactively calculated for your approximate tax bracket.

 

Hmm..ok. I guess I was not sure in regards to that part..whether it took YTD or just the current paycheck to make the estimated annual pay. I could be wrong, but I think different payroll systems may handle that differently.

[FVBrewerFan]

Easy for me to say, but at the end of the day it doesn't really matter. This will all come out in the wash when you do your tax return. Unless you have to pay a big amount or get a big refund, you don't have an issue.

 

As others have said, bonus, commission, etc. is taxed at a much higher rate. Beyond that, it really shouldn't vary unless it's a really weird payroll system.

[jerichoholicninja]

I don't get any fancy bonuses or anything, just straight hourly. I'm not overly concerned about it. My wife is the one who makes the money and my job covers the cost of my existence and keeps me out of trouble.

[Outlander]

As others have said, bonus, commission, etc. is taxed at a much higher rate. Beyond that, it really shouldn't vary unless it's a really weird payroll system.

I know what you mean but don't want to cause any confusion. Bonus, commission, etc. is not taxed any higher, however it may be withheld at a higher rate. When you do your taxes you won't pay a higher tax just because you received a bonus or commission.

[FVBrewerFan]

Thank you, yes. Point taken, I just noticed my post makes it sound like this type of income is TAXED at a higher rate, which it is not.

[whizkid]

The difference in withholding on those checks with a couple hundred extra dollars on them is also going to depend on how many allowances you claimed on your W-4. You said you're married and are both working so you and your wife need to coordinate how many allowances you are claiming in total.

 

http://www.irs.gov/pub/irs-pdf/fw4.pdf

 

Line C is the one you may need to adjust. If you have kids then others might apply too.

[jerichoholicninja]

The difference in withholding on those checks with a couple hundred extra dollars on them is also going to depend on how many allowances you claimed on your W-4. You said you're married and are both working so you and your wife need to coordinate how many allowances you are claiming in total.

 

http://www.irs.gov/pub/irs-pdf/fw4.pdf

 

Line C is the one you may need to adjust. If you have kids then others might apply too.

 

We just got married this summer so we haven't filed jointly before and I don't know how we will this year.

[whizkid]

Don't know how you will what this year? File? Your two choices are married filing jointly and married filing separately. It's unusual when married filing separately results in less total tax owed but you can run the numbers both ways to find out. It's also complicated somewhat because Wisconsin is a community property state.

 

https://turbotax.intuit.com/tax-tools/tax-tips/General-Tax-Tips/Five-Tax-Tips-for-Community-Property-States/INF22912.html

[Patrick425]

If you think your combined married income will move you into a higher tax bracket than what is currently being withheld from your pay separately, then you could possibly end up with an unpleasant tax bill when you are doing your taxes. My wife and I found that out the hard way several years ago. The solution to this seems like it would be to file separately. However, as someone pointed out, there are pros and cons to this and usually this does not end up in lower taxes (because there are certain credits and deductions that you lose out on filing separately). The more common solution is to increase your tax withholding on your pay so that you don't end up paying a big bill at the end of year.

 

Also, I know people enjoy getting big tax refunds...but it really is a horrible idea to count on it or plan your deductions so you get a big refund. If you find you are getting big refunds every year, the better plan is to adjust your withholding to get more pay every paycheck and use that money to pay off debt or save for retirement/college. Why give the government a free loan? Ideally you want to be as close to even at tax time as possible (maybe even owe a little).

[FVBrewerFan]

Married filing jointly....the 2nd best advantage of being married so take advantage of it.

[jerichoholicninja]

Ya, I know pretty much nothing about taxes. I wish the government would just send you a bill that says how much you owe and be done with it. It shouldn't be up to me to try and figure out how to work the system so I pay as little as possible.

[Patrick425]

For most tax payers using a program like Turbo tax, H&R Block, or Tax Cut will help you not overpay taxes. It's only if you have some unusual financial conditions that you have to make sure you are not missing anything (own rental property, had a large amount of medical expenses, sold a valuable painting, etc). The bigger issue is making sure you don't get caught with some large, unexpected tax bill at the end of the year because you didn't have enough taxes withheld from your paycheck.

[DHonks]

I can't find the link, but for my Econ unit on gov't revenue I quote a number that businesses and individuals in the US spend roughly $150 Billion annually to help them file their taxes.

 

Count me as someone in favor of a flat tax, or at least a much flatter tax code. I like simplicity. I also think we need lower taxes to help out businesses. but now I'm going to push towards being political. Really, I'm glad I don't make these decisions

[BrewersSuperCollector]

I overpay, and overpay by a lot. Its like a savings plan for me. Ya, ya, ya I know I'm giving the government an interest free loan. I'd piss away some, to probably most of the money on something I don't need otherwise. When I get my windfall of cash I pay down the mortgage more, pay off car loans, etc.

[Patrick425]

I overpay, and overpay by a lot. Its like a savings plan for me. Ya, ya, ya I know I'm giving the government an interest free loan. I'd piss away some, to probably most of the money on something I don't need otherwise. When I get my windfall of cash I pay down the mortgage more, pay off car loans, etc.

 

So I know you didn't post this to get a lecture or advice on this but I'm going to give it anyways because what you are doing drives me nuts!!! At least you don't take your windfall and use it on a big purchase. I will give you credit for that. However, if you are using it to pay down your mortgage or car loan, why not do that earlier. If you pay more every month during the year rather than a one time bigger additional payment at tax time, you will pay off the mortgage or other loan sooner and you will spend less money over the life of the loan. Or, if your work has a defined contribution retirement plan that allows employee contributions, you would be sooooo much better off in the long run putting an extra percentage or two into that every year. Anything but letting the government sit on that money all year! Ughhh!!

 

Edit: Not to belabor the point, but if your mortgage company or car loan company told you that they wanted you to pay X amount of $ every month over and above what you already owe, but that they were not going to apply it to your principal balance until the end of the year, would you do it? That's basically what you are doing by purposely paying the government more than you owe them each month.

[BrewersSuperCollector]

I overpay, and overpay by a lot. Its like a savings plan for me. Ya, ya, ya I know I'm giving the government an interest free loan. I'd piss away some, to probably most of the money on something I don't need otherwise. When I get my windfall of cash I pay down the mortgage more, pay off car loans, etc.

 

So I know you didn't post this to get a lecture or advice on this but I'm going to give it anyways because what you are doing drives me nuts!!! At least you don't take your windfall and use it on a big purchase. I will give you credit for that. However, if you are using it to pay down your mortgage or car loan, why not do that earlier. If you pay more every month during the year rather than a one time bigger additional payment at tax time, you will pay off the mortgage or other loan sooner and you will spend less money over the life of the loan. Or, if your work has a defined contribution retirement plan that allows employee contributions, you would be sooooo much better off in the long run putting an extra percentage or two into that every year. Anything but letting the government sit on that money all year! Ughhh!!

 

Edit: Not to belabor the point, but if your mortgage company or car loan company told you that they wanted you to pay X amount of $ every month over and above what you already owe, but that they were not going to apply it to your principal balance until the end of the year, would you do it? That's basically what you are doing by purposely paying the government more than you owe them each month.

 

Paying the mortgage or car payment a couple extra hundred dollars a week is good in theory, but it just doesn't work for me. I know I'd piss some of that money away. Having less take home money each week keeps me on a tighter budget, and I refuse to keep a credit card balance. $10,000 at 3.5% for the year costs me about $200 a year. I'd piss that away easily.