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The Take Home Pay Brackets

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I want to introduce something I call the Take Home Pay Brackets, which isn’t going to be some mind blowing concept and likely it’ll have been discussed before elsewhere and I just haven’t seen it yet, but it refers to how the various taxes (income, social security, medicare) affect your take home pay. Oftentimes people make decisions with regards to their income (such as how much another $1 into their 401(k) will affect their take home pay) and the marginal tax rate, I recommend that you include social security and medicare payments into the equation because what you’re really looking at is how your take home pay is affected by your decision.

Here are the 2006 marginal tax brackets (single filers):

  1. 10% for income between $0 and $7,550
  2. 15% for income between $7,550 and $30,650; plus $755.00
  3. 25% for income between $30,650 and $74,200; plus $4,220.00
  4. 28% for income between $74,200 and $154,800; plus $15,107.50
  5. 33% for income between $154,800 and $336,550; plus $37,675.50
  6. 35% for income above $336,550; plus $97,653.00

So if you’re making exactly $74,200, every extra dollar you earn will be taxed at 28% and not at the 25% rate. While in most cases this is “good enough” for comparative purposes, I think it doesn’t capture enough information because it excludes how much is taken away from your pay by Social Security, also known as FICA (Federal Insurance Contributions Act), and Medicare.

Here are the 2006 take home pay brackets:

  1. 17.65% for income between $0 and $7,550
  2. 22.65% for income between $7,550 and $30,650; plus $1,332.58
  3. 32.65% for income between $30,650 and $74,200; plus $6,564.73
  4. 35.65% for income between $74,200 and $94,200; plus $20,783.81
  5. 29.45% for income between $94,200 and $154,800; plus $27,913.81
  6. 34.45% for income between $154,800 and $336,550; plus $45,760.51
  7. 36.45% for income above $336,550; plus $108,373.39

Social Security is a funny little creature and that’s what explains the take home pay dip when you move from #4 to #5, and why #6 is still, percentage-wise, lower than #4. Social security payments are capped at $5,840.40 which is 6.2% of $94,200. Medicare has no such cap.

Anyway, the purpose of this post was just to illustrate the difference between the income tax brackets and the “take home pay” brackets (ignoring other individual specific paycheck deductions like health care benefits, disability benefits, etc.). Isn’t it somewhat surprising to see that dip?

{ 17 comments, please add your thoughts now! }

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17 Responses to “The Take Home Pay Brackets”

  1. Foobarista says:

    Actually, it’s even wierder than that. Truly accounting for SS should be done by doubling it – and increasing the wage by the SS percentage, since this is how much it actually costs to hire a worker at a salary/wage. I posted about this a few days ago on my blog.

  2. jim says:

    Well, you’re talking about a totally different perspective than I was, in your case you wanted to know the total compensation (plus invisible to the employee taxes and insurance) whereas I just wanted everyone to think about SS and Medicare (and letting me know if I was wrong) whenever they’re making financial decisions dealing with their paychecks.

    I do like your post though, it makes a good point, employer paid taxes aren’t really employer paid…

  3. Foobarista says:

    One thing you may add is to bump the tables to account for the standard deduction. This especially helps at the lower end of the table, and shows how SS hits lower-income taxpayers really hard. The standard deduction (or total itemized deduction) affects the income tax brackets, but not the SS/Medicare take.

  4. Paul says:

    The drop in the marginal rate that you point out for income subject to FICA is reflected many years later when you collect Social Security. Only income up to the Social Security Wage Base is included in the formula for Social Security. So your brackets above $92,400 don’t get any more credit than the first $92,400 in 2006 toward their Social Security benefit. These higher brackets don’t pay Social Security Tax, but they also don’t get any benefit from Social Security for their income above $94,200. We could get into long arguments about whether the amount you put into Social Security is worth it to you (or to society). I just wanted to point out that unlike income tax that once paid doesn’t affect your future, the Social Security Tax that you pay does. (or at least under current law does…. that’s another long argument.)

  5. jim says:

    Foobarista – Excellent point, I won’t make the changes only for the sake of complexity (once you introduce one deduction, you open up the whole pandora’s box) but it’s a good point.

    Paul – While Social Security is a benefit we may receive in retirement :) , I’m only considering the “forced” effects on take home pay, a category I believe we could both agree fits SS just nicely. But yes, it’s not the same animal as income tax (though you could argue we receive the benefits of income tax immediately), it’s in the same category for this article’s sake.

  6. dePriest says:

    When I was in college, we had a speaker who had been in one of Hitler’s camps who said we were the “most over-taxed, under-represented” people in the world. This is the “over-taxed” part in black and white; the proof of our underrepresentation is seen in the news daily.

  7. Martha says:

    dePriest, if you look at other countries, e.g. Germany, Sweden, Finland, or Norway you can see that we are much less taxed than they are. The only difference is that for them health care is almost free, schooling is excellent for all children and they take care of their elderly. I believe that Finland is currently ranked as the best place to live in the world. If they tax heavily but put it back into their citizens I have no problem if the US wants to follow their lead.

  8. Bob says:

    So, I just saw this article
    link
    and I thought of this posting.

    Explain to me how Warren Buffet is paying ” far, far less as a fraction of his income than the secretaries or the clerks or anyone else in his office” without, as the article claims, doing any tax planning. Surely his annual income exceeds that $336K.

  9. Bill says:

    Warren Buffet can claim to play less in taxes as a percentage of his earnings than his secretary does because most of his earnings are derived from capital gains, not income. Capital gains is taxed at a lower rate than wage income, assuming that the person earns a reasonably high wage salary, especially capital gains made on investments over the long term. From what I know, Warren Buffet tends to invest in companies for the long term. His secretary is probably in one of these 30% brackets for her income, where as he is paying 15-20% in capital gains.

  10. catsuny says:

    I agree with Finland I also think that our take home pay is the actual amount and taxes based on that since we already paid taxes on the check we receive wkly/bi wkly.A lot of things are based on gross amounts which is bull iw ould love like everyone to take home the gross.
    My take home pay is minus 150..per wk. as others .THE whole tax system isnt fair we are taxed no matter what it all has to be revamped
    the gov spends our money and lives off it .THESE people and there families could never live like the middle class or less unfortunate.
    I want more of my check back i dont want srs. to pay school taxes or anybody who doesnt have children,then they should pay only 1%
    property county state taxes are way out of control. I dont have town water ,sewer,i provide both for my home but my property taxes have gone up 4 x in 2 yrs,school taxes 3 x 2yrs. my mortgage i struggle to make because of these taxes. iam disabled and let me tell you i barely grocery shop iam told i make to much money for food stamps because of that gross unfair i dont hav ethat money.I see so many in line with these stamps ,they have expensive clothes then you go out in the parking lot and they have expensive cars i dont get it i once was told youve been working for 28 yrs you made way to much,,,is it all a koke if you live here legally what is going on to the real americans…i am getting hungry and we only drive when we have to i mean have to go heat is a joke to cant have that neither i only have .25 i n my tank its nov.wow both of us i n our late 50s we jave been working since age 13 ..no joke our parents had us out and helping and teaching us savings ..if i take my 401 out iam TAXED AGAIN HMMMM MY MONEY NOT THE GOV. BUT THEY WANT SOME MORE OF MY MONEY THEN WHEN ITS TIME FOR ME TO HAVE IT THEY WILL TAX ME AGIN WHEN I T IS USED FOR INCOME ARE WE STUPID OR JUST LAZY AND JUST LET THEM KEEP TAKING ,THERE HAS TO BE A CHANGE IF NOT THIS COUNTRY WILL BE IN WAR WITH EACH OTHER

  11. dogfogy says:

    catsuny, please do tell us all exactly how you do feel. I am not getting your point?

  12. Donald Vande Velde says:

    Come on Obama follow up on the promise of taking the government heel off the working class. We are in big time debt any way. Increase these tax brackets to 10% of taxable income ——— to 80,000 dollars. The first 80,000 dollars to be very clear would NOT be taxed at ALL. THEN THE 10% bracket would be effective for taxable income over 80,000 dollars. YOU WANT A SHOT OF ADRENALINE FOR THE ECONOMY ———— THIS ACTION WILL DO IT.

  13. Donald Vande Velde says:

    My comment is awaiting MODERATION?????????? More like censorshipation. NOTHING NEEDED TO BE MODERATED. No fowl language. No anti patriotic call to government assembly. Where are coming from.????????????????

  14. pat says:

    What we need is to go to the FAIR TAX system. that way everybody pays thrieto pay our taxes fair share no matter if you make $100 per week or $1oo,000 if you buy something you pay tax but the money you earn or get for retirement in yours to spend as you see fit, not the goverment. Do away with the IRS entirely. go to the hospital care like Canada hasand most Europian countries. That way every one has healthcare and does not have to choose wheather to buy their needed perscriptions or eat this month. At the end of the year if we had fair tax we would not have to worry how we are going to pay the additional taxes with the Fair Tax they would be paid. Not let credit card companies charge more than 6% interest that is on any type of credit card. People who pay their mortages if interest rate is higher than 6.99% reduce it to that, and people who have a lower rate because they pay their billa give them an automatic 1.50% reduction in their interest rate. School loans should not ever have more than a 1% interest rate. If you want to help the middle class this would. The banks should be taken over by the federal goverment and this would stop the corporate crazy spending. When you as a middle class citizen loose your IRA because it was invested in the stock market you can’t even get a tax credit for any part of your loss, it is like that money goes in a black hole and then you find out the black hole is the CEO’s fancy office. Well, I’ve said my peace, I don’t expect it to fall on anyone’s ears who can help us ordinary people, but at least I got it off my chest.

  15. Anonymous says:

    My new employer informed me that the president increased federal taxes for 2010, is this true?

    • Jim says:

      Your new employer is wrong. The President doesn’t have that authority, Congress does.

      Article I, Section 8, Clause 1 of the United States Constitution says: “The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;”


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