Working Overtime Doesn’t Mean You Pay More Taxes
Understanding Your Money
Non-members can here!
Not exactly, anyway. You will pay more taxes as your Adjust Gross Income (AGI) increases. The misconception is that you’re paying more disproportionately because the lion’s share of your OT goes to taxes. This is the bit that’s not entirely true.
You’re probably saying, “I’ve looked at my pay statements; I see what’s going where.” I would say that’s true! So now that you’re wholly and utterly confused, let me clarify. Payroll taxes are determined by the individual pay period. This means that (assuming you’re paid biweekly) the gross amount is multiplied by 26 to determine your annual income. Then taxes are deducted as if you were to make that check 26 times.
You see, it doesn’t keep a running total. So what is actually happening is that the payroll tax thinks you’re making more annually than you might actually earn and taxes you appropriately based on that metric. So, as a quick example, a full-time, $10/hour earner AGI is approximately $20,800. This earner works 120 hours for one pay period instead of their normal 80. Payroll tax thinks this earner makes about $36,400 annually now! That’s a whole standard deductible difference and then some!
