I just got out of college, still live with the parents (saving up money) been employed for a year in the industry, and got a not bad starting salary. First check I received was shocking, to see 28.5% cut off for Federal + MA State + SS Employee. And this is prior to enrolling in the 401k.
Is that normal?
Is that normal?
Yes. It's in fact pretty low. Just the FICA taxes you pay are ~7.5%, so you're paying ~21% for State and Federal. Pretty reasonable, especially if you live in a high-tax state (which MA is ~5.3% on all income).
Yep. You're single, you're possibly still a dependent on your parent's taxes (in lieu of rent), and you're finally bringing home bacon instead of bacon bits. Welcome to the working world.
Let's say your gross salary is the U.S. median of $50,000. With bi-weekly checks (26 a year; common practice) you're getting $1923.08 per paycheck. In the 2013 "Percentage Method" tax tables, here's how your federal withholding is calculated as a single person paid biweekly:
At Least: But less than: Base W/H Amount: Marginal Percentage:
$85 $428 $0.00 10%
$428 $1,479 $34.30 15%
$1,479 $3,463 $191.95 25%
$3,463 $7,133 $687.95 28%
$7,133 $15,406 $1,715.55 33%
$15,406 $15,469 $4,445.64 35%
$15,469 $4,467.69 39.6%
Federal taxes are computed piecewise; the amount up to A is taxed at X%, then the amount between A and B is taxed at Y%, so if you make $C, between A and B, the tax is (A*X) + (C-A)*Y. The amount A*X is included in the "base amount" for ease of calculation.
Back to our example; let's say you're getting $1923.08 gross wages per check. That puts you in the 25% marginal bracket. You pay the sum of all lesser brackets (which is the "base amount" of the 25% bracket), plus the 25% marginal rate on every dollar that falls within the bracket. That's 191.95 + (1923.08 - 1479) * .25 = 191.95 + (444.08 * .25) = 191.95 + 111.02 = $302.97 per paycheck. The "effective" tax rate on the total amount, as if you were being charged a flat tax, is 15.75%, and this is just for the federal income tax.
Add to this MA state income taxes (5.25% flat tax), FICA (aka Medicare; 1.45% flat) and SECA (aka Social Security; 6.2% up to a "wage base" that $50k doesn't even approach), and your effective tax rate on each dollar you earn is 15.75% + 5.25% + 1.45% + 6.2% = 28.65%. This doesn't include any state unemployment taxes that may be withheld separately, but as the rate I come up with is pretty darn close to what you've figured (meaning I slightly overestimated your gross income and thus your effective tax rate), my bet is that SUTA's either employer-paid in MA, or it's just part of MA state income tax.
It gets better, at least at the federal level:
The amount of your state income taxes is tax-deductible at the federal level if you itemize your deductions. That may not be a factor for you as you'd have to come up with more than $6,100 of other tax-deductible expenses to make itemizing the better option than taking the standard deduction (big-ticket items are mortgage expenses other than principal payments, hospital stays such as for childbirth or major accident, and state and local taxes such as sales, property and income).
If you can claim yourself as a dependent (meaning your parents can't), then $150 of each check ($3,900 of your annual salary) is no longer taxed for federal withholding, lowering the amount of money taxed at the 25% marginal rate. You effectively save $37.50 biweekly ($975 annually) in taxes.
Get married and file jointly, and your spouse, her personal exemption, and an extra standard deduction amount (if you don't itemize) go on your taxes. The tax rates for married couples filing jointly are also lower; they're currently calculated (or were in 2012) to be the same as if two equal earners were to file separately, so if your spouse doesn't work, your taxes on the single income are calculated at the rates you'd get if you earned half as much. It doesn't work out to half the taxes, but it is a significant "marriage advantage".
Have kids, and each one is another little $3,900 tax write-off. It's nowhere near the cost of having or raising the child, but it helps, and having kids isn't about the money.
Owning a home, making charitable deductions, having medical expenses, etc are a toss-up. The magic number in 2013 is $12,200 for a married couple, $6,100 for a single person. If your mortgage interest, insurance premiums, property taxes, medical expenditures, charitable donations, any contributions from your take-home pay to a tax-deferred savings account (typically these accounts are paid into by your employer as a "pre-tax deduction" and never show up as taxable income, but you could just as easily move money from your take-home pay into tax-deferred savings) and any other tax-deductible payments add up to more than 12 large, then itemize. If not, take your standard deduction. As a single taxpayer just starting out in life, you probably don't have any of these types of expenditures, certainly not enough to give up the SD.
I did the math on my own taxes in 2012, and was surprised at how little the government actually gets of my paycheck when all's said and done. Remember back in the summer of 2012 when everyone was mad at Romney for making millions and only paying an effective income tax rate of 14%, which was compared to the middle class's marginal rate of 25-28%? Well, my family of 3, living on a little more than the median income from one earner (me), taking the married standard deduction, three personal exemptions, and a little extra for student loan interest, paid an effective federal income tax rate of something like 3.5%. Of course, the FICA and SS taxes don't allow any deductions (not even for retirement savings), so add in the 4.2% SS (in 2012) and 1.45% FICA and the full federal gimme was more like 9-10%.
Yes that is not an unusual number.
In some states the state tax rate is fairly flat, and unless you are highly paid the social security and medicare taxes are also flat. The big issue is the federal number.
Several things can make make the federal taxes for the early paychecks larger than normal.
later checks will include these pretax amounts which will reduce the taxable income, and the taxes. Though the net check will get smaller.
Keep in mind that the size of the checks your first year are impacted by the fact that most recent graduates start in the summer. The tax tables assume that each of the paychecks you receive will be essentially the same. For those recent graduates the 1st real paycheck dwarfs the average paycheck for the first part of the year. This can put you in a higher bracket than you should be, and result in a large refund when you file in the spring. You can adjust your withholding numbers after a few checks to counterbalance this. Of course the numbers will need to be changed back in year two to to avoid under withholding.
Yes, it is normal. I'm single & pay 32% in North Carolina. Single men & married people ask me all the time why it's so high and it gets frustrating having to explain to average people. I assume it's because I have no kids, live alone, don't own a house, am not in school, am not self employed etc. I've been at this job for 10 years and it's been over 30% since I can remember.
Welcome to the real world. BTW, you have far too rosy a view of this if you think you're only paying 28.5% of your income in taxes.
Remember that your employer theoretically pays half your FICA tax. But as far as they're concerned, that's part of the cost of having you as an employee. If FICA was abolished, supply and demand would quickly push salaries up by an amount equal to the FICA tax. So add another 7.65% to your taxes. Plus your employer has to pay unemployment tax (federal unemployment tax is $420 per employee per year, states vary) and workman's compensation tax (no idea how much that is) for the privilege of having you as an employee.
You likely pay sales taxes on most everything you buy. I believe sales tax in Massachusetts is 6.25%. Assuming you pay that on only half of what you buy, add another 3% or so.
Do you work for a corporation? Between when they sell the fruits of your labor and when they pay you, they have to pay corporate income tax. There are a lot of deductions so that gets complicated, but figure another few percent.
Do you drive a car? You're paying gas tax -- 41.9 cents per gallon in MA. Do you smoke or drink alcohol? Extra taxes on those. Travel by plane or stay in a hotel? More special taxes.
When you get around to buying a house, you'll pay property taxes on it every year, year after year. For me in Michigan that's another 3% of my income. I understand it's a lot more in Massachusetts.
Etc, many other smaller taxes that add up.
