I make more but get less (tax ?)

Factual Questions
1

OK I got a very small raise just now 60¢ an hour.

I usually work 9 hours of overtime (2 week pay period)

I got my paycheck and low and behold I am taking home less.

Not much like a few dollars but I noticed I pay more in taxes (it seemed to have bumped by total deductions (taxed, SS, 401K up from taking home 72% to 71%)

Being a little lazy to figure this out. If I work more overtime would this continue? In otherwords would I always take home less at this rate than at my previous rate. If I worked less than 9 hours O.T. would I be taking home more?

2

It’s possible that with the overtime, you made enough to just bump you into the next higher tax bracket. Without knowing exactly what you make with and without OT, it’s hard to say for certain. Most deductions are a contstant percentage of gross pay, so an increase in pay doesn’t usually result in a lower net. However, if you cross tax brackets, the percentage increases, and you may well see a drop in net.

3

Yes all my deductions are constant including 401K but I figured out percentage wise working 9 hours of O.T. puts me $6 less a paycheck.

I know I am teetering on the border of a tax bracket

I guess what I want to know if I worked less would that generally put me with more take home or would I have to work more to overcome the tax.

4

If you work a lot of overtime, that can skew the withholding formulas, and take a disproportionate amount of taxes out.

Then, at filing time next year, you would either a) get a little higher refund (since you had been overtaxed), or b) not have to pay as much (if you ended up owing money).

5

“However, if you cross tax brackets, the percentage increases, and you may well see a drop in net.”

This is a popular misconception.

Here is how tax brackets work (from the 2000 Tax Rate Schedule) at http://www.irs.gov/forms_pubs/graphics/10311g87.gif. Say you are single, and your taxable income is $26,250. You pay 15% of the $26,250 or $3937.50. You get a raise so that your taxable income is now $26,251. This bumps you up into the 28% bracket. But the 28% only applies to the income beyond the first $26,250. The first $26,250 is still taxed at 15%. So with the $1 a year raise you pay 15% of $26,250 or $3937.50 plus 28% of $1.00 for a total of $3637.78, which is $0.28 more than you paid without the raise; your net never drops as a result of moving up a bracket.

If you look at the Tax Tables at http://www.irs.gov/forms_pubs/graphics/10311g75.gif you will see that the taxes never go up faster than the income so the net never drops as a result of an increase in income.

Having said that, I am not claiming that your your $0.60/hr raise did not increase your taxes in such a way that your net is lower. Taxes are very complex and I can’t rule out that possibility. I can say, however, that if your net dropped it is not because you entered a higher bracket on your federal income tax.

6

The previous post is correct. What might have happened is your employer bumped up your withholding percentage on your paycheck. If you know what you are doing, you can claim a larger amount of exemptions on your W-4 and take home more pay. If you do this too much however, you could face underpayment penalties.

7

My last job I tried claiming 2 and wound up oweing tax. I now claim one.

Before my fed tax was at 29.6% of my gross. Now they are taking out 28.9% gross so the percentage of fed tax being taken out is less, but it results in $6.00 less a paycheck NET.

Now I am starting to wonder if they are doing something wrong. The paymaster is only a clerk and H/R who runs the payroll gives you the old line “you’ll make it up either way when you pay your taxed.”

I guess it’s a point, but then again it would be a way of getting out of the extra O.T. by saying “Why work and get less.”

I guess it doesn’t really matter I just almost always work 9 hours OT I was just wondering if I worked less would my net actually go up. I was to lazy to figure out the math.

8

Yeah is correct that your scheduled increase should generally not affect your take home pay if you cross a bracket at the beginning of the year. As of next April 15, you will not have to pay more on your original income than you were paying a month ago. However, the payroll deduction program is calculating how much to withhold as if you were making the same amount all year. Therefore, it looks at your earnings last week and (effectively) figures that you will earn 52 times that, this year. Since that $.60 an hour was not available to you for the first five months of the year, when you figure your total 2001 taxes, your current withholding will have been too high and you will get a refund. And, yes, working overtime causes the same effect.

If you want to increase your take-home pay and decrease your refund, next April, you have to sit down with a calculator and a rate schedule and fill out a revised W-4 to change the amount of withholding the program should base its calculations on.

9

Strictly speaking, Yeah’s analysis, above, doesn’t quite fit the situation. We are dealing with monthly deductions, not yearly tax (and I fully agree with Yeah when considering total yearly tax).

One factor that comes into play is whether OT pay is flat-taxed or subject to standard withholding. Since the calculation of standard withholding can become a nightmare, especially if the OT check comes at a different time during the month than the regular check (this is how it works where I work), it is often easier to subject the OT pay to a flat-tax based upon the current tax bracket.

Using a flat-tax scenario, consider the following:

Last month, your taxable income was $2392 - the max monthly amount for the %15 bracket. You FWT (assuming no deductions) would be about $325.65, and your ‘net’ (actually, for our purposes here, the Gross minus the FWT) would be $2066.35.

This month, say you got a $1/month raise. This puts you at $2393, which is the minimum for the 28% bracket (actually, it’s $2392.01). This would put your FWT at $325.93 and your gross at $2067.07.

So, without OT, your net increases slightly, as one might expect.

Now, let’s factor in 9 hours of OT:

Last month, you made $2392 regular, which would put your hourly rate at about $13.80 / hr. So 9 hours of OT grosses $124.20. Now, if OT is flat-taxed, they simply take out a straight percentage - in this case 15% (of course, this neglects the fact that the OT alone would actually put you over the edge in this case). So, the FWT is $18.63 for the OT portion, and the OT net is $105.57 (again, neglecting other deductions). Total monthly check, therefore, is $2171.92

This month, you now make 2393 regular, which translates to essentially the same /hr figure. However, your flat-tax rate is now 28%. So, you make $1 more regular, but you wind up losing 13% on the OT. So now, the FWT on the OT is $34.78, resulting in a gross OT of $89.42, and a total monthly net of $2155.77, or a loss of $15.16 over last month, despite a $1 raise!

Again, there are lots of assumptions being made here, and some simplified calculations, but my point is that it can happen that a raise might result in a lower net pay without any chicanery on the part of HR.

10

I think it is important to distinguish between a net pay and a net pay check. The net pay is what you end up with at the end of the year after you pay your taxes. Your net pay check depends on assumptions made by your payroll department about how much tax should be withheld from your paycheck and is something that you can change by submitting a changed W-4 form.

11

Your W-4 can only adjust the taxable income, based on the number of exemptions you claim (and it’s a flat number as well: as of 01/01/01, it’s $241.67 / exemption claimed). It doesn’t change the way the withholding tax is actually calculated (unless you go from ‘married’ to ‘single’, or vice versa).

And I thought we were talking about net paychecks (at least, that’s what the OP says).

12

Today’s W-4 form (in contrast to W-4 forms of years ago) is rather complicated and provides many ways for a taxpayer to either increase or decrease her deductions as explained in Publication 919.

I thought Darwin’s Finch was talking about net income (the OP’s “would I be taking home more” being ambiguous).

13

I cannot think of any way, other than a calculation error by the payroll clerk, that an increase in gross can result in a decrease in net due to increased withholding. Darwin’s Finch’s example using a flat 15% rate before the raise and a flat 28% rate after the raise for the OT falls into the mistake category, because flat rate withholding on OT must use a 28% rate, regardless of the rate applicable to the employees wages.

Of course, as Markxxx has pointed out, the decrease in net was clearly not caused by an increase in the percentage withheld for taxes, because the percentage actually decreased, from 29.6% to 28.9%.

My experience has been that most apparent anomalies disappear once all relevant information is known. I can’t help noticing that Markxxx said he “usually” works 9 hours OT. Does that mean he worked different amounts of OT in the two periods in question?