OMG! If I make a few extra dollars, I'll actually lose money because of taxes!
Someone already did the math so that won't happen. People who make more money also have more after-tax money.
But I heard that I'll pay a higher tax rate if I make more money!
Yep, but tax brackets protect you so that if you make more money, you keep more money.
How's that work?
Okay. Let's say you are in the 23% tax bracket...
Wait. I can't do 23% without a calculator.
Good point. Let's make up a tax table with round numbers to make the math easier.
No problem. Here's the table:
|NET INCOME||TAX RATE|
See! I'm going to get screwed! If I make $9,999 I pay nothing, but now I get an extra $2 and I lose 10% of all my money!
You only pay the 10% of the part which is over $10,000. So you pay nothing on the $10,000. Then you pay 10% on the $1, which is only ten cents tax.
Yep. Ten cents.
So if I make $1000 a month, how much should I pay?
If you make $1,000 a month, then you make $12,000 per year, right?
So here is your tax table. We fill in the amount you earn from each bracket, multiply by the rate, and add.
So you are supposed to pay $200 overall.
But that can't be how it works. They took money out of my very first check! Why don't they wait until I actually make $10,000 to start taking out money?
That's because of Christmas.
Yes, Christmas. If they did wait until you made $10,000 to start collecting the tax, when would you pay it?
um... It takes ten months to get up to $10,000. So I pay $100 each in month 11 and 12.
That's November and December
Oh, I get it. They be taking out the money right when I'm supposed to buy Christmas presents and it'd ruin the economy. So they spread it around.
More or less.
But what if I lose my job or get a raise? Won't they collect the wrong amount?
You're catching on. They don't know exactly how much money you are going to make, so they have to make a guess based on your paycheck. At the end of the year you fill out your tax forms to see how good the guess was...
Oh! So if I paid too much I get a refund!
Right. And if you didn't pay enough, you send it in with your forms.
I like the refund better.