5 ms·

Earning six figures and just scraping by

9 points by peter123 18y ago

smoody 18y ago
A quick question: Is it or is it not the case that the higher tax rate is only applied to income over the $250K threshold? So, if you make $260K, then only $10K would be taxed at the higher rate and the rest would be taxed at the lower rate. Or is it that 100% of the income gets taxed at the higher rate? I've heard it argued both ways. The majority of the people out there seem to think it's the latter, but the people who believe it's the former, though fewer in number, are very passionate. I always tend to believe the few-but-passionate over the general consensus when it comes to issues that are glossed-over in the press.
- DanielBMarkham 18y ago
  Your income determines your tax rate. Your tax rate applies to everything you make. As a consultant who's salary easily gets into the six figures, and somebody who has to write a check quarterly, I can tell you that the progressive tax system, to me, is a great disincentive to being more productive. I'm just as happy with less billing and no tax worries (except for the startup dream, of course) I directly control how much I make, so I think I would have some personal insight into how tax rates affect small businesses. But what do I know? As I understand it from my peers and the article, I should be happy to do all of that extra work to support other causes. I don't know what's wrong with me. I must be terribly selfish, assuming that I should work for me and my family instead of the collective good. Funny that I don't feel that selfish.
  - DannoHung 18y ago
    Can't you increase your withholding?
    - DanielBMarkham 18y ago
      When you're self-employed, there is no withholding. You simply write a check out each year (or each quarter, if you make enough) for your taxes. This has the effect of making you very aware of just how much money is going to you and how much money is going to the government. With withholding, people never see the money they're losing -- hard to miss what you've never had. In general, though, increasing withholding is exactly what I do when I work as a contract employee. But I rarely do that any more. At some point, your rate just doesn't fit into a W-2 kind of pay scale. I'm in an interesting spot because my income can be zero, nadda, nil, or it can be upper-middle class. It's all up to me and the market. Most of the tax laws, however, are written with joe sixpack the wage earner in mind. So I end up making a lot one year, owing a bunch of taxes, and then when the bill comes I'm making zero. Then I have to choose between paying taxes and feeding the family. Or the flip-side, you borrow money when you're making zero and then you start up a high-rate job and have to spend the first few months paying back loans instead of getting caught up on back taxes. But like I said, listening to others I'm sure there must be something wrong with me. Maybe I should find a more "normal" job where I could have deductions taken out instead of being so independent entrepreneurial,and self-employed.
      - cschneid 18y ago
        ... You should be putting tax money aside with each check you get, really easy. Open up one of the online savings accounts, and throw money at it. Right now I withhold about 30% of each check to cover all the various taxes I'll owe. Then I pay the minimum for quarterly taxes (to avoid the fine). Then, it's easy to write the check for your chunk of taxes at the end of the year, since you've saved it up. You should have the discipline to not go raiding your tax bucket.... it's not your money.
        DanielBMarkham 18y ago
        You should have the discipline to not go raiding your tax bucket.... it's not your money See that's where I have a problem. If I sell you an apple, and you give me five bucks, for some reason I have this feeling that the five bucks really belongs to me. And yes, I understand the theory of how this should work, after all, I am not an idiot. I'm just explaining to you how it actually works. In reality, when you've got $40K in the bank for taxes and the gig is up and there's no money coming in, you're choosing between taxes and living for a year. Maybe you can sleep better at night paying taxes, but I've got to take care of my family first.
    - cschneid 18y ago
      He's a consultant, so not really. He's liable for quarterly "estimated tax payments", which should be 1/4 of the expected amount you owe to the government for the year. But it's best to pay the minimum required by law, and bank the interest on the rest. Also, he's wrong saying that the tax rate applies to the whole income. This isn't that hard people. EVERYBODY pays the same tax rate on the first chunk of money. Then, a higher tax rate on the second chunk. Then a higher rate on the third chunk, and so on. The last chunk-cutoff is at $250k. So you only pay the higher taxes on anything OVER that amount. So you make $255k per year, you're only getting a tax hike on the last $5k, and a tax cut on the rest (Assuming all of Obama's tax rhetoric on lowering taxes for everybody else is true, haven't looked close personally). That's not to say that that self employed people (running a business w/ employees, or just a contractor) don't get screwed. There is another tax to cover social security. If you work for an employer, it's split half and half between the employee and the employer. But, since you are your own employer in the case of contracting work, you owe both halves. This is what's called the "Self Employment Tax". Although remember that economics says that the business will just respond to this tax by lowering your salary the same amount, making you pay the whole tax anyway.... Anyway, the tax system really isn't that complicated. There are lots of little details, but the basics of it are fairly well thought through, and are reasonably fair.
      - DanielBMarkham 18y ago
        the tax system really isn't that complicated You can't be serious. Let's not even get into double-taxation, not being able to deduct health insurance, all of the crazy tax credits and tax deductions out there. The income tax code in this country is so complex that there is a multi-billion dollar industry simply explaining it to people and helping them do their taxes. It's so complex that the IRS itself routinely gives out bad advice on it's own hotline -- the agents simply don't understand the very law they're supposed to enforce. Then there's all the deductions and such that nobody really understands because there is no legal precedent, or because the cases conflict. Good luck with those. But -- most of that is self-employed stuff. Stuff that's not Joe Sixpack wage earner. I'll grant you that much. However -- this is a board started for people talking about startups, not people working at the local Wal-Mart.
- ivank 18y ago
  http://news.ycombinator.com/item?id=501825 http://news.ycombinator.com/item?id=501825
  - eru 18y ago
    Yes. And if you still have any questions, why not read the relevant laws?
    - smoody 18y ago
      People ask questions here because there's an efficiency that comes from asking someone who already knows the answer vs. the time to, say, read through pages and pages of tax laws. I'm happy to share wisdom when it's quick and easy to spread if it saves someone else a couple of hours of work. But, your suggestion does result in a new acronym: RTFL! :-)
      - eru 18y ago
        Yes, the time savings can be huge, but you have to take into account that legal opinions voiced in internet fora can be less than reliable.
  - smoody 18y ago
    Thanks. It is amazing how much misinformation there is about this issue.
- beza1e1 18y ago
  quick question rephrased: Alice earns $250,001 and Bob earns $249,999 each before taxes. Who has more money after tax? If the increased tax rate is applied to 100% of the income, then Bob gets more money than Alice and the system is stupid. Easier to calculate, but unfair. Update: After reading the other link, i believe that the US tax system isn't stupid. Alice still has more money than Bob after taxes.
  - DanielBMarkham 18y ago
    I do not believe the wisdom of the board is correct. I believe at the discontinuity Bob earns more. This seems in line with both the bracket system of progressive taxation and my experience with preparing taxes. But if somebody has a real, live explanation from an accountant, I'd love to see that link. Happy to be wrong. EDIT: Here's the link I was looking for. I stand corrected. http://www.fivecentnickel.com/2008/12/04/how-do-federal-income-tax-brackets-work/ http://www.fivecentnickel.com/2008/12/04/how-do-federal-inco...
- apsec112 18y ago
  Here's how the system works for US Federal income tax: The tax structure is divided into brackets. As of now (2009), the brackets are 10%, 15%, 25%, 28%, 33%, and 35%. Each bracket has a cap, except for the top one; the caps range from $8,000 for the 10% bracket up to $358,000 for the 33% bracket (for single taxpayers, married taxpayers have different caps). Any income you earn under the cap is taxed at that rate. Any income you earn over the cap spills over into the next bracket, and is taxed at the next rate. As an example, suppose that last year, you made $100,000, you're single, and you take the standard deduction. The current standard deduction is $5,000, so that reduces your taxable income to $95,000. The first $8,000 dollars that you earn is under the 10% cap, and so it's taxed at a rate of 10%. Since you earned more than that, you spill over into the other brackets; the next $24,000 you earn is taxed at 15%, the next $46,000 after that spills over into the third bracket and is taxed at 25%, and the final $16,000 is taxed at 28%. All together, your taxes are: $8,000 * 0.10 + $24,000 * 0.15 + $46,000 * 0.25 + $16,000 * 0.28 = $20,380 (The actual figure is $20,578, but I rounded.) Hence, even though the tax rate on the last dollar you earn is 28%, you only pay 20.4% of your total income in taxes. What Obama wants to do is rearrange the brackets so that, if you earn any income above $250,000, the income that spills over into the top brackets will be taxed at a 3% higher rate. Suppose you made $300,000 last year. $50,000 spills over into the $250,000 bracket, and so you pay 3% of extra tax on $50,000, or $1,500. Which, if you make $300,000 a year, is roughly a day's pay.
jleyank 18y ago
If you think the US tax system is bad, get a job in Canada or Europe. I've done this and am dealing with the combination of lower income, higher taxes and currency fluctuations. However, it's interesting work so it's an acceptable tradeoff (and we've been able to lower expenses and expectations).
- davidw 18y ago
  I think what's worst about the US system is that it's confusing and arbitrary and has tons of loopholes. Also, the US is one of the few countries that still taxes you even if you don't live in the country.
  - jleyank 18y ago
    Yeah, but there's several ways to avoid paying US taxes in such cases. Foreign taxes are credited against US taxes, and something like 85K income and then housing expenses are removed from one's foreign income... Unless you make gobs of bucks, this double taxation isn't a problem (other than having to give the IRS and Treasury info about one's finances).
    - davidw 18y ago
      Sure, but still, you can go to the US from a country with really high taxes (Sweden, for example) and they won't mess with you because you are living abroad. You can earn as much or as little as you want, and you pay US taxes only.
      - arjunnarayan 18y ago
        As a citizen of the United States, you still benefit enormously from the power and wealth of your country. As a non-citizen, I've seen the power that blue passport with the eagle possesses. The next time there's a disaster and you're abroad, where do you head to? Straight to the nearest consulate/embassy. Flash that passport, and you disappear behind the high walls with barbed wire and guards with submachine guns. The safety net your country provides you is incredible. If you're so detached from the US and don't want to pay for it, (and are already abroad and settled somewhere else) why don't you give up your US citizenship? You still could visit the US as much as you wanted (as long as you left within 6 months). Ponder that, and then you'll realize the enormous benefits of simply wielding the blue-eagle passport.

9 points by peter123 18y ago

A quick question: Is it or is it not the case that the higher tax rate is only applied to income over the $250K threshold? So, if you make $260K, then only $10K would be taxed at the higher rate and the rest would be taxed at the lower rate. Or is it that 100% of the income gets taxed at the higher rate? I've heard it argued both ways. The majority of the people out there seem to think it's the latter, but the people who believe it's the former, though fewer in number, are very passionate. I always tend to believe the few-but-passionate over the general consensus when it comes to issues that are glossed-over in the press.

DanielBMarkham 18y ago
Your income determines your tax rate. Your tax rate applies to everything you make. As a consultant who's salary easily gets into the six figures, and somebody who has to write a check quarterly, I can tell you that the progressive tax system, to me, is a great disincentive to being more productive. I'm just as happy with less billing and no tax worries (except for the startup dream, of course) I directly control how much I make, so I think I would have some personal insight into how tax rates affect small businesses. But what do I know? As I understand it from my peers and the article, I should be happy to do all of that extra work to support other causes. I don't know what's wrong with me. I must be terribly selfish, assuming that I should work for me and my family instead of the collective good. Funny that I don't feel that selfish.
- DannoHung 18y ago
  Can't you increase your withholding?
  - DanielBMarkham 18y ago
    When you're self-employed, there is no withholding. You simply write a check out each year (or each quarter, if you make enough) for your taxes. This has the effect of making you very aware of just how much money is going to you and how much money is going to the government. With withholding, people never see the money they're losing -- hard to miss what you've never had. In general, though, increasing withholding is exactly what I do when I work as a contract employee. But I rarely do that any more. At some point, your rate just doesn't fit into a W-2 kind of pay scale. I'm in an interesting spot because my income can be zero, nadda, nil, or it can be upper-middle class. It's all up to me and the market. Most of the tax laws, however, are written with joe sixpack the wage earner in mind. So I end up making a lot one year, owing a bunch of taxes, and then when the bill comes I'm making zero. Then I have to choose between paying taxes and feeding the family. Or the flip-side, you borrow money when you're making zero and then you start up a high-rate job and have to spend the first few months paying back loans instead of getting caught up on back taxes. But like I said, listening to others I'm sure there must be something wrong with me. Maybe I should find a more "normal" job where I could have deductions taken out instead of being so independent entrepreneurial,and self-employed.
    - cschneid 18y ago
      ... You should be putting tax money aside with each check you get, really easy. Open up one of the online savings accounts, and throw money at it. Right now I withhold about 30% of each check to cover all the various taxes I'll owe. Then I pay the minimum for quarterly taxes (to avoid the fine). Then, it's easy to write the check for your chunk of taxes at the end of the year, since you've saved it up. You should have the discipline to not go raiding your tax bucket.... it's not your money.
      - DanielBMarkham 18y ago
        You should have the discipline to not go raiding your tax bucket.... it's not your money See that's where I have a problem. If I sell you an apple, and you give me five bucks, for some reason I have this feeling that the five bucks really belongs to me. And yes, I understand the theory of how this should work, after all, I am not an idiot. I'm just explaining to you how it actually works. In reality, when you've got $40K in the bank for taxes and the gig is up and there's no money coming in, you're choosing between taxes and living for a year. Maybe you can sleep better at night paying taxes, but I've got to take care of my family first.
  - cschneid 18y ago
    He's a consultant, so not really. He's liable for quarterly "estimated tax payments", which should be 1/4 of the expected amount you owe to the government for the year. But it's best to pay the minimum required by law, and bank the interest on the rest. Also, he's wrong saying that the tax rate applies to the whole income. This isn't that hard people. EVERYBODY pays the same tax rate on the first chunk of money. Then, a higher tax rate on the second chunk. Then a higher rate on the third chunk, and so on. The last chunk-cutoff is at $250k. So you only pay the higher taxes on anything OVER that amount. So you make $255k per year, you're only getting a tax hike on the last $5k, and a tax cut on the rest (Assuming all of Obama's tax rhetoric on lowering taxes for everybody else is true, haven't looked close personally). That's not to say that that self employed people (running a business w/ employees, or just a contractor) don't get screwed. There is another tax to cover social security. If you work for an employer, it's split half and half between the employee and the employer. But, since you are your own employer in the case of contracting work, you owe both halves. This is what's called the "Self Employment Tax". Although remember that economics says that the business will just respond to this tax by lowering your salary the same amount, making you pay the whole tax anyway.... Anyway, the tax system really isn't that complicated. There are lots of little details, but the basics of it are fairly well thought through, and are reasonably fair.
    - DanielBMarkham 18y ago
      the tax system really isn't that complicated You can't be serious. Let's not even get into double-taxation, not being able to deduct health insurance, all of the crazy tax credits and tax deductions out there. The income tax code in this country is so complex that there is a multi-billion dollar industry simply explaining it to people and helping them do their taxes. It's so complex that the IRS itself routinely gives out bad advice on it's own hotline -- the agents simply don't understand the very law they're supposed to enforce. Then there's all the deductions and such that nobody really understands because there is no legal precedent, or because the cases conflict. Good luck with those. But -- most of that is self-employed stuff. Stuff that's not Joe Sixpack wage earner. I'll grant you that much. However -- this is a board started for people talking about startups, not people working at the local Wal-Mart.
ivank 18y ago
http://news.ycombinator.com/item?id=501825 http://news.ycombinator.com/item?id=501825
- eru 18y ago
  Yes. And if you still have any questions, why not read the relevant laws?
  - smoody 18y ago
    People ask questions here because there's an efficiency that comes from asking someone who already knows the answer vs. the time to, say, read through pages and pages of tax laws. I'm happy to share wisdom when it's quick and easy to spread if it saves someone else a couple of hours of work. But, your suggestion does result in a new acronym: RTFL! :-)
    - eru 18y ago
      Yes, the time savings can be huge, but you have to take into account that legal opinions voiced in internet fora can be less than reliable.
- smoody 18y ago
  Thanks. It is amazing how much misinformation there is about this issue.
beza1e1 18y ago
quick question rephrased: Alice earns $250,001 and Bob earns $249,999 each before taxes. Who has more money after tax? If the increased tax rate is applied to 100% of the income, then Bob gets more money than Alice and the system is stupid. Easier to calculate, but unfair. Update: After reading the other link, i believe that the US tax system isn't stupid. Alice still has more money than Bob after taxes.
- DanielBMarkham 18y ago
  I do not believe the wisdom of the board is correct. I believe at the discontinuity Bob earns more. This seems in line with both the bracket system of progressive taxation and my experience with preparing taxes. But if somebody has a real, live explanation from an accountant, I'd love to see that link. Happy to be wrong. EDIT: Here's the link I was looking for. I stand corrected. http://www.fivecentnickel.com/2008/12/04/how-do-federal-income-tax-brackets-work/ http://www.fivecentnickel.com/2008/12/04/how-do-federal-inco...
apsec112 18y ago
Here's how the system works for US Federal income tax: The tax structure is divided into brackets. As of now (2009), the brackets are 10%, 15%, 25%, 28%, 33%, and 35%. Each bracket has a cap, except for the top one; the caps range from $8,000 for the 10% bracket up to $358,000 for the 33% bracket (for single taxpayers, married taxpayers have different caps). Any income you earn under the cap is taxed at that rate. Any income you earn over the cap spills over into the next bracket, and is taxed at the next rate. As an example, suppose that last year, you made $100,000, you're single, and you take the standard deduction. The current standard deduction is $5,000, so that reduces your taxable income to $95,000. The first $8,000 dollars that you earn is under the 10% cap, and so it's taxed at a rate of 10%. Since you earned more than that, you spill over into the other brackets; the next $24,000 you earn is taxed at 15%, the next $46,000 after that spills over into the third bracket and is taxed at 25%, and the final $16,000 is taxed at 28%. All together, your taxes are: $8,000 * 0.10 + $24,000 * 0.15 + $46,000 * 0.25 + $16,000 * 0.28 = $20,380 (The actual figure is $20,578, but I rounded.) Hence, even though the tax rate on the last dollar you earn is 28%, you only pay 20.4% of your total income in taxes. What Obama wants to do is rearrange the brackets so that, if you earn any income above $250,000, the income that spills over into the top brackets will be taxed at a 3% higher rate. Suppose you made $300,000 last year. $50,000 spills over into the $250,000 bracket, and so you pay 3% of extra tax on $50,000, or $1,500. Which, if you make $300,000 a year, is roughly a day's pay.

jleyank 18y ago

If you think the US tax system is bad, get a job in Canada or Europe. I've done this and am dealing with the combination of lower income, higher taxes and currency fluctuations. However, it's interesting work so it's an acceptable tradeoff (and we've been able to lower expenses and expectations).

davidw 18y ago
I think what's worst about the US system is that it's confusing and arbitrary and has tons of loopholes. Also, the US is one of the few countries that still taxes you even if you don't live in the country.
- jleyank 18y ago
  Yeah, but there's several ways to avoid paying US taxes in such cases. Foreign taxes are credited against US taxes, and something like 85K income and then housing expenses are removed from one's foreign income... Unless you make gobs of bucks, this double taxation isn't a problem (other than having to give the IRS and Treasury info about one's finances).
  - davidw 18y ago
    Sure, but still, you can go to the US from a country with really high taxes (Sweden, for example) and they won't mess with you because you are living abroad. You can earn as much or as little as you want, and you pay US taxes only.
    - arjunnarayan 18y ago
      As a citizen of the United States, you still benefit enormously from the power and wealth of your country. As a non-citizen, I've seen the power that blue passport with the eagle possesses. The next time there's a disaster and you're abroad, where do you head to? Straight to the nearest consulate/embassy. Flash that passport, and you disappear behind the high walls with barbed wire and guards with submachine guns. The safety net your country provides you is incredible. If you're so detached from the US and don't want to pay for it, (and are already abroad and settled somewhere else) why don't you give up your US citizenship? You still could visit the US as much as you wanted (as long as you left within 6 months). Ponder that, and then you'll realize the enormous benefits of simply wielding the blue-eagle passport.