Which superhero doesn’t pay any taxes? SpiderMan. Because all of his income is net.
Bad jokes aside, do you remember the first time you saw the difference between your gross pay and your take-home pay? Ouch!
Your base salary is one amount, but your take-home pay probably looks a lot different. Depending on your filing situation, during tax season you may receive a refund from the government, or you may owe more. Let’s break down the different pieces of calculating taxes to discover how much you’re making after paying your taxes.
Gross pay is the amount of money that you earn from your employer before any taxes, benefits, or other deductions are taken out of your check.
Your net pay is the amount of money you actually receive in your paycheck every pay period.
If you are self-employed or a freelancer, then your gross pay is what you collect from your clients for services rendered. You are responsible for your own record keeping to ensure that you are putting enough money away for taxes.
To understand how much your gross pay will decrease because of taxes, you will need to understand tax brackets.
According to Investopedia, “A tax bracket refers to a range of incomes subject to a certain income tax rate. Tax brackets result in a progressive tax system, in which taxation progressively increases as an individual’s income grows.”
In short, your tax bracket increases as your income increases. People in higher tax brackets will see a bigger difference between their gross and net pay than people in lower brackets.
Related: What’s the Difference Between Progressive Tax and Regressive Tax?
Everyone is charged 10% of their first $10,275 of income. If someone makes between $0 and $10,275, they are in the 10% tax bracket and pay 10% of their income, or $1,027.50.
If a single filer makes between $10,276 and $41,775, then they pay $1,027.50, as well as 12% of the amount over $10,275.
Here’s an example: Someone who makes $40,000 isn’t taxed at 12% of their total income, which would be $4,800. Instead, they would be taxed $1,027.50 to start. The amount they make over $10,275 is $29,725. 12% of $29,725 is $3,567. Their total tax obligation then is calculated by adding the base tax of $1,027.50 to $3,567, totaling $4,594.50.
Moving further up the tax brackets, if someone earns between $41,776 and $89,075, then they are in the 22% tax bracket. They’ll pay the base $1,027.50, followed by 12% of what they earned in the 12% tax bracket, and 22% on everything over that.
A person who single files with an income of $50,000 would pay about $6,800 in taxes. That’s 14% total, not 22%.
This is called the effective tax rate.
Here are the tax brackets for single filers for the 2022 tax year.
|
Tax Bracket Income Range |
Tax Bracket (Identified by Percentage) |
Actual Tax Owed |
|
$0 to $10,275 |
10% |
10% of your taxable income |
|
$10,276 to $41,775 |
12% |
$1,027.50 plus 12% of the amount over $10,275 |
|
$41,776 to $89,075 |
22% |
$4,807.50 plus 22% of the amount over $41,775 |
|
$89,076 to $170,050 |
24% |
$15,213.50 plus 24% of the amount over $89,075 |
|
$170,051 to $215,950 |
32% |
$34,647.50 plus 32% of the amount over $170,050 |
|
$215,951 to $539,900 |
35% |
$49,335.50 plus 35% of the amount over $539,900 |
|
$539,901 or more |
37% |
$162,718 plus 37% of the amount over $539,900 |
Small businesses, sole proprietorships, Partnerships, LLCs, Corporations, and freelancers need specialized help with their taxes from people who understand the ins and outs of the U.S. tax code.
Are you wondering, “Why is my tax return so low?” Do you need help navigating the tax system based on how much you bring in? What about ensuring that your employees have accurate guidance on the right amount of taxes withheld from their paychecks? Are you sure that you’re covering all of your bases?
A small business CPA in Memphis can help! Chaliff + Associates supports small business owners so that they can focus on growing their business instead of getting bogged down by tax codes!
Schedule your free consultation with Chaliff + Associates today.