This is waaay wrong. It totally ignores marginal taxes. Your tax bracket tells you the percentage you owe on the last dollar you earn. Your raise is taxed entirely at the marginal rate. Your total taxes (what you’re calculating) tells you the average tax rate, which is way different, particularly if you make less than $100K.
Another thing the OP might wish to keep in mind is treatment of income from investments and savings. I believe that banks and brokerage houses in the UK deduct tax from interest and dividend payments, though I’m not certain of this. US institutions generally do not. Form 1099s are sent to US taxpayers (and to the IRS) listing the additional income, which will not have been pretaxed (except for some foreign investments for which the foreign government collected a tax, and for which you can take a foreign tax credit). It doesn’t take much investment income to throw the standard exemption figures filed with a W-4 to your employer out of whack. You may, in fact, have to file quarterly 1040-V forms and pay estimated taxes to the IRS. Failure to do so, resulting in owing large tax payments at tax return time, may result in the same penalty payments as having your employer deduct too little tax.
The estimated tax payments are a pain, but people who have built up investments may find that even taking zero deductions from their employer doesn’t prepay enough tax. As others have stated, there are two philosophies. Some people just overpay, and get money back from their tax return. For others, it’s a little game of avoiding giving the government an interest-free loan without incurring penalty payments, and you win if you actually wind up owing tax but no penalties. One easy-to-remember guideline is that if you are expecting a substantial increase in income, you are not penalized as long as you paid 110% of your previous year’s taxes. Pay that much, and you won’t get penalized even if you wind up owing thousands of dollars at tax time.
Well, yeah. I said that. But if you are merely trying to ballpark how much more money you’re going to see in a paycheck if you are getting a typical raise, it’s much easier to have a baseline of how much in taxes you’re currently paying, and make a not too accurate extrapolation from that. If you’re trying to figure out your take-home pay if you double your salary, of course this method isn’t going to work.
The alternative is to try to establish an effective tax rate based on data that people typically only compile at tax time… which is what that website is trying to do. I just don’t see that most people would know their total deductions off the top of their head, for example – I personally am not all that sure about how much I pay in pretax retirement contributions, mortgage interest, state taxes, and charitable contributions. Without that information, there’s no way to get a five-second income tax analysis that is anything but a complete stab in the dark.
It would (of course) be possible to use the approximation Ravenman suggests, but it does require the user to provide three pieces of information before they get one piece back, and that one piece is not awfully accurate.
Someone suggested earlier that most Americans expect to lose about 1/4 to 1/3 of their salary, so I could just multiply by .7 and display that figure :).
I think I’m going to have to face the facts - this site is not going to be comprehensive. But then, the UK one isn’t either, and still gets used. If you see a job advertised with a salary of $40k (say), you can quickly find out roughly how much your employer will withhold depending on what deductions you declare.
When it comes to tax return time, things get more complicated, and I can’t help you unfortunately.
Taking all of this into account, then, do you think I should get the 2005 data off there, and put the 2006 tax bands etc on instead? That would reflect what your employer’s going to withhold now, and it will help make sure no one thinks this is for doing your return on?
Thanks again for all your feedback.