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PaperclipPerfector  6mo ago (text post)   4099 thread views

Small-Scale Question Sunday for November 5, 2023

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How do income taxes work in the US? Let's say I am offered a salary of $100k, what's the rule of thumb to estimate my take-home pay?

For comparison, here's how it's done in Russia. Let's say I am offered 9M rubles per year. This amount includes my income tax that will be deducted by the employer and excludes my social security contributions that will be paid by the employer on top of 10M. There are just two tax brackets: 13% on the first 5M, 15% on the rest. So my take-home pay is 50.87+40.85=7.75M rubles annually.

From what I know about various EU countries, it's more or less the same, except the number of tax brackets is higher and there are additional concerns like having a (non-)working partner and/or underage children that affect the tax rate, but your income taxes are done by the employer.

US tax code is huge, byzantine and confusing. It's on purpose, because taxation is used as political football, and taxing or de-taxing various things (depending on whether enemies or friends do the things in question) is a favorite pastime among Congressmen.

Employer does usually deduct your taxes, but it's not where it ends, unless you are either rather poor or live very simple life. At the end of the year, you are supposed to check how much you owe, either by reading IRS instructions purposefully made as confusing as possible without rendering them in ancient Egyptian, or pay somebody to do it for you (most people choose the latter). Then you include various additions (e.g. if you own savings account, stock, had side income, etc.) and deductions (charity donations, secondary taxes - property, state, etc., and the football stuff). Then you send them a special form to the IRS, and if you owe the man, you must pay, if the man owes you, they'll eventually send you the money. Not submitting the taxes is a crime, especially if you owe the man (I am not sure they'd aggressively go after you if they owe you).

The whole system has some nice ideas in it (e.g. charity deductions make the US citizens one of the most prolific charity givers in the world) but, as a lot of other systems in the US, with time it grew into unholy monstrosity, and since so many political interests are baked into it, nobody can do any reasonable change, but only add more and more monstrous tentacles to it.

Russia has a lucky chance to reset its system pretty recently, and as far as I remember, banking/taxation were one of very small number of areas in Russia taken over by professionals who were listened to by the Powers That Be. I am genuinely surprised they ended up with the system that actually makes sense.

Let's say I am offered a salary of $100k, what's the rule of thumb to estimate my take-home pay?

There are multiple calculators online, but: a) take home pay doesn't mean you don't owe more on the tax day b) it depends on your state of residence (US is a federal republic, remeber?) and sometimes also city c) it also depends on whether you are married and how much your spouse makes, and how many kids you've got d) it also depends on crapton of other things. So the online calculators will only give you the ballpark figure, if you want something better, you pay an accountant or learn IRS's version of ancient Egyptian.

I am genuinely surprised they ended up with the system that actually makes sense.

There are a few major problems with it:

  • Income tax is a federal tax (actually, only property and land use taxes aren't), so regions are dependent on federal financial support
  • Social security payments are strongly regressive and are paid by the employer

But otherwise it's not remotely as byzantine as the US tax code.

so regions are dependent on federal financial support

That's a feature for The Vertical of Power, I am sure.

Social security payments are strongly regressive and are paid by the employer

The same is true for the US on the regressive part, but "paid by the employer" I feel is mostly a trick since it all figures in total cost per employee, and I'm pretty sure business owners can do that calculation (which is also true for the US, of course). Still, it is not exactly a "problem" as I see - it doesn't make anything different, it just looks different.

The trick means employees don't really feel these payments. Tye government is free to adjust the rates up or down without any reaction from the public.

Of course, it's old and true trick, which the US system uses much more extensively than Russia. I' just saying on the whole, it still makes Russian system look much less broken - which in general would be a weird thing for me to say, but I must admit the truth when I see it.

and the football stuff

And the football stuff?

The stuff that I previously described as subject to political football - all kinds of deductions or special taxes meant to subsidize or hurt certain categories of people, for political reasons. Taxes in the US is very actively used in politics.

A couple of fairly high profile examples- Trump reducing the deduction amount for state taxes incentivized moving to red states. The inflation reduction act contained lots of special deductions for green stuff of various kinds.

Federal tax brackets are here. It works more or less like what you say about the EU. The exceptions come from deductions, which effectively lower your income. That’ll usually be the “standard deduction,” so your average American can slide those brackets up by $13,850.

Thus, federal taxes on 100K USD, which is on par with those 9M rubles, would be about 14%.

Things get weird depending on state taxes, but I live in Texas, so I don’t really think about them much.

In the US, unlike almost every other developed country, taxes aren’t (edit: universally) deducted by employers. Instead, employees are responsible for filing and paying their taxes. In a way, I don’t think this is a bad thing, it’s probably responsible for moderately more conservative American views on taxation (even if these aren’t reflected in policy).

In addition to federal income taxes (which range from 10% to 37%), there are also state and even municipal income taxes. Some states like Texas prefer to tax property or sales/goods instead of income. Some tax both property and income, or property, income and sales to varying amounts. At various times there have been both state and federal deductions for taxes paid to other jurisdictions. There was a big fight in the last (and start of this) administration about whether and to what extent state and local taxes could be deducted from federal taxes, which benefits high tax (blue) states at the expense of low tax (often red) ones.

What this means is that in some parts of the US - most notably NYC - high earners deal with tax rates that are actually very comparable to and sometimes even exceed those of most Western European ‘social democracies’ (approx 50% marginal rates). The US isn’t a ‘low tax’ society; in ‘lower tax’ states property taxes are often extremely high by global standards for example. It’s just a very rich society, even compared to Western Europe.

EDIT: Also, the US taxes globally. These taxes are deducted from local taxes where the US has a tax treaty (almost everywhere), so in the UK I don’t pay any American income taxes, but if I moved to, say, Dubai or Hong Kong I’d be liable for the full federal rate minus whatever income tax I paid locally. Anyone who makes more than $100,000 a year has to file, and even those who make less have to declare that they do so, provide their bank accounts and so on (of course the US government/IRS already has them, they force all global banks to report the financial data of any US citizen (which makes opening accounts abroad extremely painful), they just want to try to catch you out).

In the US, unlike almost every other developed country, taxes aren’t (edit: universally) deducted by employers.

That's not accurate - most employers certainly deduct taxes, and at least some legally obligated to do so. Well, at least each one I have been employed with did. But, if they under-deduct or over-deduct, it's not their or taxman's problem - it's yours.

Also, the US taxes globally. These taxes are deducted from local taxes where the US has a tax treaty (almost everywhere), so in the UK I don’t pay any American income taxes, but if I moved to, say, Dubai or Hong Kong I’d be liable for the full federal rate minus whatever income tax I paid locally.

This is the biggest shit ever and is basically the sole reason I do not want to move long term to the US to get a green card/citizenship.

Really, even considering all the benefits? Wouldn't you income be higher anyway?

In the US, unlike almost every other developed country, taxes aren’t (edit: universally) deducted by employers.

Every W2 employee has tax withholding which is usually pretty close to their actual owed taxes. The only way to avoid this is to be a contractor, in which case you will need to file payments of your estimated taxes as the year goes by.

You do engage with the income tax system annually, but that is to calculate your final actual taxes owed for the year. If that is less than you paid in via withholding, then you get a refund (this is the normal case), and if it is more, then you have to write a check for the remainder. If it is ever or routinely substantially more, perhaps due to side business activities or investments, then you may be required to make periodic payments of your estimated annual taxes before the end of the year. The IRS very much wants to be giving people a small but positive refund every year, and many people even consider it to be a "bonus" and plan around it.

Withholding is most definitely mandatory, and the IRS will be very unhappy with you if you try to dodge it or intentionally have less withheld than your expected taxes. I'm not sure where you got the idea that it isn't, but it's not true.

Universal Federal withholding was established in the US back in WWII, as a "temporary" measure to get the Feds money needed for the war effort sooner, and never removed. Some fiscal conservatives have advocated for removing it to actually force most Americans to write large checks every year, and thus save for them and make it more painfully obvious exactly how much they are paying. This is most likely a non-starter given how bad most people are at saving for such a high-magnitude future expense and how much effort would be needed to chase down everybody who accidentally or intentionally failed to save enough or otherwise dragged their feet. It's a pretty extreme position that nobody anywhere near actual power is prepared to touch. Pretty much everyone has since gotten in on the act of getting other entities than individuals to actually write the checks for tax payments, as it's much easier to coerce businesses than individuals.

In the US, unlike almost every other developed country, taxes aren’t deducted by employers.

Most W-2 filers do indeed have their taxes withheld by employers.

Sure but it’s not universal in the way it is elsewhere. Here, every single employee has taxes deducted automatically and the government even takes an extreme line against anyone ‘self employed’ who, say, has only one customer to try to pressure people into becoming ‘PAYE’ staff.

Almost every employed American engages with the tax system every year. Many employed Brits I know don’t regularly engage with the tax system at all except when the local council sends the (very small) property tax bill, which they calculate and you just pay (and you typically set it up for debit so that you’d only engage with them if you moved house).

How does it work in practice, though?

Since I'm a sole proprietor, I have to pay my own taxes, but it's a relatively simple deal - at the start of the year my accountant asks me what I assume my next year's income will be and after I make an estimate (typically estimating that it's somewhat more than in the past year), she sends me bills to pay the next year's presumed tax sum in six batches, ie. a batch every two months. Then the estimate gets specified throughout the year on the basis of my actual work, changes to taxation and, say, what deductions I'm getting, so this year I've had to pay a lot of taxes towads the end of the year. Then, when the tax office finalizes the previous year's taxation, if I've paid more than the actual final sum calculated on the basis of the year's actual income and deductions I get a rebate and if I've paid less I'll pay back taxes.

Simple enough, and the whole process means just a few added extra hours the accountant bills me per year, in addition to the usual processing of bills and invoices. In addition to national taxes there are local taxes, but those are all handled as a part of the same process, ie. the local tax rate (along with the assorted deductions) is just slapped on top of the national tax rate and the tax office processes all of it as a part of the same process.

However, every time the American taxation system is discussed, I get the feeling that even a normal worker has to do something infinitely more comples than this. Is it the state/local taxes and their effects? (Of course a normie worker won't need an accountant, but my understanding is that it would be possible for me to do it all myself without that much extra work if I was intent on saving money.)

The process for independent contractors in the US is essentially the same, except payments are made quarterly.

However, every time the American taxation system is discussed, I get the feeling that even a normal worker has to do something infinitely more comples than this.

Not really. The process is annoying, but it isn't actually anywhere near as difficult for typical filers as Americans make it out to be. For someone that has only typical employment income, they'll fill out a couple forms at their employer that allow the employer to withhold taxes based on their salary and marital status. Those taxes are withheld from paychecks. At the end of the fiscal year, the employee receives a W-2 form, which lays out what they earned and what they paid; this is information sent to the Internal Revenue Service. Using cheapie tax software (I used FreeTaxUSA this year), they can punch some info in to figure out whether itemized deductions make sense, but for someone with standard deductions, they can knock this out in about a half hour. The software will spit out whether the government owes you or you owe the government, then you file electronically and link your bank account to either withdraw or receive a deposit.

State and local taxes are typically similar.

Property taxes are typically billed by the locale and paid as a lump sum for the year, or quarterly payments.

Situations that become horribly complex and require a professional are typically involving business and investment considerations, which really do get comically complex with things like depreciation schedules. For someone that just makes $100K/year at their very normal job, buys a very normal house, and puts a bunch of money into index funds, I genuinely have no idea why they think taxes are hard.

For someone that just makes $100K/year at their very normal job, buys a very normal house, and puts a bunch of money into index funds, I genuinely have no idea why they think taxes are hard.

This isn’t hard, but depending on things like family structure and what state you live in, it can turn into a game of ‘how do I get the biggest refund from the government’, because A) the government likes to try to change middle class consumption patterns with subsidies paid out as tax refunds and B) most workers overpay from their payroll deductions anyways.

The one caveat I'll give is that filing taxes as a sole proprietor or self-employed worker can be fucked, even at fairly low incomes. In theory it's not the sort of thing that the IRS makes that much hay over unless you do something incredibly wacky, but there are some obnoxious penalties that can come up for stupid reasons.

For someone that just makes $100K/year at their very normal job, buys a very normal house, and puts a bunch of money into index funds, I genuinely have no idea why they think taxes are hard.

It's not hard, it's just tedious and needlessly stressful because you are manually copying data from form to form and a typo can (but often doesn't) result in a lot financial and/or legal pain.

The normal US worker will do very little.

Their employer will give them a small half sheet of paper called a W2. If this is their only income, they can file a 1040EZ which takes 15 minutes or so. If they have investment income, they will typically use software like TurboTax to file a 1040. This might add a couple hours depending on the complexity of the return

In most states, they will also have to file with the state, so add 50% to the time.

If you own a business, it's a nightmare. This is no different in Europe I assume.

Again, as a sole proprietor, my taxes and general business bureaucracy are quite simple. I pay my accountant on average maybe 100 € / month, a trifle compared to other costs.

... depends on how precise of an estimate you want.

The roughest value is to take your gross income, subtract the standard deduction, and then pass the value through marginal tax rates, for federal taxes. State (and sometimes county/city) taxes follow a similar process, albeit usually with much smaller marginal tax rates. There's also Social Security (6.2% up to 112k) and Medi* (1.45%) employee portions; while employers pay the same amount, this isn't reflected in income.

So for an unmarried US employee with no dependents (mostly means 'no kids') getting 100k USD, you'd take the single standardized deduction of 13,850 USD to give 86,150 USD of adjusted-gross income. The first 11k USD would be taxed at 10% (1,100 USD), the next 33,725 USD at 12% (4,047 USD), and the next 41,425 USD at 22% (9,113.5 USD), for a total of 14,260.5 USD in federal income taxes. SSI/Medi* doesn't use the normal deductions and applicable deductions for them are complex and rare (they're technically payroll taxes, not income taxes, but they're taxes based on income so fuck the IRS), so around 7560 USD for them.

State and county taxes vary a lot. A quick rule-of-thumb for 5% is wrong but not useless, and gives about 5k USD.

So an estimated post-tax-withholding income of around 73,089.5 USD. In practice, probably a little bit more than that due to other withholdings or lower state income taxes, but about that realm.

This presumes that you're taking the standardized deduction: for a lot of people this makes sense, especially at lower income ranges, but there are itemized deductions that can if you do a lot of charity donations, recently purchased your first property, so on. One that used to be more relevant was the state-and-local-tax (SALT) deduction, which let you deduct lots of state taxes from your federal income tax; it's since been capped at the same time that the standardized deduction was increased, so it's less likely to be a sole cause to itemize. There are also some tax credits that sometimes reduce this number (or even turn it negative for lower-incomes). I... honestly don't know off the top of my head whether income automatically directed to social security withholdings are part of your income for tax purposes or not, though the employer side definitely isn't considered part of your income for tax purposes (or even advertised to employees).

Note that this is specifically income taxes; the US does a lot with property and sales taxes, too. You will also probably have some other items taken out of your paycheck (health insurance usually being the big one), and your employer may have certain retirement plans you can choose to go with that are usually good deals but aren't liquid without some cost penalty.

Rule of thumbs: 20% at 50k; 25-30% from 75-100k; 30-35% from 100k to 250k; 35-40% from 250k to 500k.

It works pretty similarly, but states are entirely separate for purposes of taxation and some tax income and others do not tax income but instead have higher property or sales taxes, e.g., Florida has no income tax, but high property taxes and Tennessee has no income tax, but higher sales tax. For a typical employee of a company ("W-2 employee" referring to the IRS form you file for this type of employment), your taxes are broken down in a similar manner. There are payroll taxes and income taxes at the local, state, and federal level. Payroll taxes are split equally between the employee (7.65% of income capped at first 100k income) and the employer and cover programs like social security and health insurance for the poor/old. There are more marginal tax brackets than your example. On 100k, after the standard deduction from gross salary ($13,850), you are in the third marginal tax bracket at the federal level. It's similar at the state level.

On 100k for a single person with no kids in a State like New York:

Payroll:

7.65% on 100k = $7,650 (your employer also pays this amount on your behalf to the government for a total of $15,300 on a "$100k" salary for both of you, but you're only responsible for half)

Income Tax:

NY: Income is $92,000 after 8,000 standard deduction. 1st Bracket: 4% for 0-8,500 = 340. 4.5% for 8501-11,700= 143. 5.25% for 11,701-13,900=115. 5.85% for 13,901-80,650=3,904. 6.25% for 80,651-215,400=709. Sum: $5,213.75

Federal: Income is $86,150 after standard deduction. 1st Bracket: 10% for 0-11,000 = 1,100. 12% for 11,001-44,725 = 4,046. 22% for 44,726-95,375 = 86,150-44,725*.22 = $9,113. Sum: $14,260.

So on a 100k salary, you pay $27,124.25 in income taxes (incl. your payroll) and your take-home pay is $72,875 in the state of NY.

These numbers change with a jointly filing partner or children as your deductions go up for dependents (children) and bracket shift upwards.

Income taxes are not done by your employer in the US. Your employer automatically pays their part and your part for payroll taxes. They also withhold a certain amount of your salary (there are conditions you can get out of this) and send it to the government per paycheck, but employees are still required to file a tax return at least 1x a year in order to account for their income and potentially get a return from the amount already sent to the government by your employer because of withholding or a bill. The same is true on the state level. Most local income taxes are done by the state so it's just an extra section if you live in certain localities on your state return.

Good to see that the brazen fiction of a "paid by employer" part to hide your true tax burden is in some form alive everywhere. I realize it is too diffuse a problem to meaningfully lobby against, but it is fascinating to me that both the original post's 9M rubles and your 100k are abstractions inbetween the sum you cost the employer and the sum you receive.

There are payroll taxes and income taxes at the local, state, and federal level. Payroll taxes are split equally between the employee (7.65% of income capped at first 100k income) and the employer and cover programs like social security and health insurance for the poor/old.

This is a very important point for people who aren't already familiar with the US income tax system. As someone who recently moved to the US and assumed that my income taxes were my fucking income taxes (imagine that!), I was furious when I saw that payroll taxes were this whole other thing that isn't even on the fucking IRS tax transcript (seriously!!) and was literally greater than my supposed "income tax".

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