Help understanding tax math

[CaptainAmerica]

Maybe I am explaining it wrong.

If the gift card was for $130, the would give you the $130 gift card, then when taxed they would give you additional as cash in your check so that when taxed on the $130 and the additional given your take home pay was the same or within a few cents. They didn't hide anything.

Is that not unlike the lottery games that say $1,000,000 taxes paid as the prize? You truly win more and the end result is $1,000,000....

That makes more sense. If the employee were to look at their pay stub, they would see a lot of "ups and downs" that are needed to make the math of that all work, even if their direct deposit was unchanged. The cash the company would have given to eliminate the tax effect of the gift card is, itself, taxable.

 

[amcnj]

And the amount they withhold for such extras may not be the correct amount for your particular tax situation, and will be adjusted when you file tax returns for that period.

I also recall cases where a small raise resulted in lower net pay due to the employee being pushed into higher brackets of such things as health care contributions. So unexpected things can happen!

 

[monsterkitty]

Not the same thing, but one year I was the only teacher that had plan first hour. That meant if there was anyone out and there wasn't a sub, I got to cover the class. I finished my Master's right before school started, but the pay adjustment didn't happen until January. I soon discovered that the extra $100/month from my Master's pay bump plus the $12/hour of covering a class a few times a week every month must have bumped me up to the next tax level. That meant I was actually taking home less than before I finished my Master's.

When I took my pay stub into the principal and showed him why I refused to cover classes, he still didn't understand why I wanted to pay to work instead of get paid to work. He was pretty cranky with me haha!

 

[SirDuff]

Not the same thing, but one year I was the only teacher that had plan first hour. That meant if there was anyone out and there wasn't a sub, I got to cover the class. I finished my Master's right before school started, but the pay adjustment didn't happen until January. I soon discovered that the extra $100/month from my Master's pay bump plus the $12/hour of covering a class a few times a week every month must have bumped me up to the next tax level. That meant I was actually taking home less than before I finished my Master's.

When I took my pay stub into the principal and showed him why I refused to cover classes, he still didn't understand why I wanted to pay to work instead of get paid to work. He was pretty cranky with me haha!

How is that possible? The next tax level only applies to the money you earn in excess of the lower limit for that level - not all the money you earn. If you were earning say $50,000 and now are earning $75,000, the taxes on the first $50,000 stay the same as they were before, so you'd earning at least as much as you were before. Now, the tax rate on the "extra" money might mean that what is leftover isn't worth it to you, but it shouldn't be possible that earning more/going into the next tax bracket has to taking home less money than before. Possibly some weird withholding, but then that would be sorted when you file your return (or, preferably, by making adjustments before then).

 

[CaptainAmerica]

Not the same thing, but one year I was the only teacher that had plan first hour. That meant if there was anyone out and there wasn't a sub, I got to cover the class. I finished my Master's right before school started, but the pay adjustment didn't happen until January. I soon discovered that the extra $100/month from my Master's pay bump plus the $12/hour of covering a class a few times a week every month must have bumped me up to the next tax level. That meant I was actually taking home less than before I finished my Master's.

When I took my pay stub into the principal and showed him why I refused to cover classes, he still didn't understand why I wanted to pay to work instead of get paid to work. He was pretty cranky with me haha!

That's not how it works. Even if it triggered some kind of step-up in your employer's withholding tables, you would have been earning yourself a higher tax refund, essentially. A higher marginal tax rate on new income doesn't retroactively increase the taxes on your old income.

 

[CaptainAmerica]

How is that possible? The next tax level only applies to the money you earn in excess of the lower limit for that level - not all the money you earn. If you were earning say $50,000 and now are earning $75,000, the taxes on the first $50,000 stay the same as they were before, so you'd earning at least as much as you were before. Now, the tax rate on the "extra" money might mean that what is leftover isn't worth it to you, but it shouldn't be possible that earning more/going into the next tax bracket has to taking home less money than before. Possibly some weird withholding, but then that would be sorted when you file your return (or, preferably, by making adjustments before then).

The way HR departments incorporate the tax code is imperfect. But as you said, all of this would have worked out at return time.

 

[mrodgers]

First mistake, and it's throughout this entire discussion, you are not taxed when you get your paycheck. They withhold an amount for taxes. You calculate the tax the following year to determine if you had enough withheld and will get a refund or if not enough and you owe.

When you have a normal paycheck, it reflects the tax bracket you are in and the amount is withheld due to the tax bracket and any other W4 information you have. If you make enough more, your paycheck can reflect you being in the next tax bracket because for that individual paycheck, it is basically extrapolated out to 26 of those amounts and tax is withheld based on that.

This is why on our production 12 hour schedule, we had 8 days in a row off and most work overtime during this time. If I worked 36 hours of overtime (3 days), my paycheck still reflected a tax withholding based on the tax bracket I am in, but if I worked 48 hours of overtime (4 days) that week my tax withholding would be based on as if I was in the next tax bracket because extrapolated out to 26 pays of that amount, I would be in the next tax bracket. I made a lot less in my paycheck working 48 hours of overtime than I did working 36 hours.

At tax filing time, the income number is an actual number which just put me a little more to the middle of my normal tax bracket, thus I would get anything over withheld as a refund.

Bonus checks are typically tax withheld at the highest tax rate because it is not a normal paycheck, thus can not be extrapolated out to 26 pay periods to determine what tax bracket you would be in at the end of the year.

 

[tvguy]

You'll see that money when you file your 2022 Income Taxes.
Used to be you could opt out of using the Withholding Tables and have a certain percentage withheld from every check. My withholding ALWAYS was almost exactly on what my final tax obligation was. Then the IRS decided you could only use their withholding table that try to put a generic tax amount on people with wildly different tax obligations.

I worked in a Union shop years ago, and the pay scales were back loaded so that when you hit 5 years, you got a like a $250 a week raise. It knocked everyone into higher withholding so their take home pay went down. Congrats, you made top scale and now take home less.