The Take Home Pay Brackets
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 is the 2006 marginal tax brackets (single filers):
- 10% for income between $0 and $7,550
- 15% for income between $7,550 and $30,650; plus $755.00
- 25% for income between $30,650 and $74,200; plus $4,220.00
- 28% for income between $74,200 and $154,800; plus $15,107.50
- 33% for income between $154,800 and $336,550; plus $37,675.50
- 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:
- 17.65% for income between $0 and $7,550
- 22.65% for income between $7,550 and $30,650; plus $1,332.58
- 32.65% for income between $30,650 and $74,200; plus $6,564.73
- 35.65% for income between $74,200 and $94,200; plus $20,783.81
- 29.45% for income between $94,200 and $154,800; plus $27,913.81
- 34.45% for income between $154,800 and $336,550; plus $45,760.51
- 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?
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There are 12 comments, add your thoughts now!
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.
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…
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.
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.)
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.
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.
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.
[...] Blueprint for Financial Prosperity with an interesting take on take-home pay brackets. [...]
[...] Posted by miller on 26 Nov 2006 at 09:29 pm | Tagged as: Taxes I ran across an interesting post by Jim of Bargaineering the other day where Jim takes a closer look how much we pay in federal taxes. Basically, the traditional “tax brackets” to which we commonly refer only reflect federal income tax and not the additional taxes of social security and medicare. Jim shows what the percentages really look like once you include those. [...]
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.
[...] Blueprint for Financial Prosperity was kind enough to publish tables that combine the IRS 2006 published federal tax brackets and the effect social security tax has on them. For simplicity purposes he published them for single taxpayers, and I will base all of my assumptions in this article on Single taxpayers with only one income source: employment wages. If we took into consideration income taxation from investments, rental properties, and other investment methods the Social Security Tax would appear as an even heavier burden on the lower income sectors of society. Doing such analysis would be, however, beyond the scope of this blog article. [...]
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.
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