Pay & Taxes

What is the difference between gross pay and net pay?

Gross pay is the salary or hourly rate your employer agreed to pay you. Net pay, your take-home, is what remains after federal and state income tax withholding, Social Security (6.2%), and Medicare (1.45%) are taken out. Pre-tax deductions like a 401(k) contribution or health insurance premium reduce your taxable income further, which is why two people with the same salary can have very different paychecks.

Will a raise push me into a higher tax bracket?

Only the dollars above the bracket threshold get taxed at the higher rate. The U.S. uses a marginal tax system. If a raise moves you from the 22% bracket into the 24% bracket, only the income above the cutoff is taxed at 24%. Your existing income keeps being taxed at the same rates. A raise never makes you take home less money.

How should I fill out my W-4?

The current W-4 (redesigned in 2020) no longer uses the old allowance system. For most single income households, completing Steps 1 and 5 is enough. Add Step 2 if you have a second job or a working spouse. Add Step 3 for the child tax credit. The goal is withholding the right amount: not a large refund (which is lending the IRS your money for free) and not a large bill at filing time.

How much extra tax do I owe if I freelance?

Freelancers owe self-employment tax (15.3%) on top of regular income tax. That 15.3% covers Social Security and Medicare, the half your employer normally pays for you when you are on payroll. You can deduct legitimate business expenses before calculating either tax. Most freelancers also need to make quarterly estimated tax payments to avoid underpayment penalties.