So is it worth it to work overtime when we're talking about taxes? I've heard a lot of
misconceptions about how overtime affects your taxes, such as there's a buffer zone
where you can work a certain amount over time but if you work any more than that...
once you're in that buffer zone all that overtime will just cancel itself out???
I'm Tim Wolffe and if you're new here please go ahead hit the SUBSCRIBE button! I needed to make
this video because I've seen a lot of videos out there and articles that are just straight
up wrong, giving you bad information about how over time and and making extra money affects
your taxes. I think we have these misconceptions because the tax laws are very confusing. But if
you stick around and watch to the end of the video I promise you'll have a much better grasp on how
taxes work than the average person and if you guys learn anything at all from this video or
get value please hit the LIKE button! It would be much appreciated! Right before filming this video
I just watched a youtube video of someone talking about, "don't work overtime because it's not worth
it, instead work two jobs so you'll have to pay less taxes." This argument does not make any sense
at all. So if you make one if you work one job and you make a $100,000 that year from working
that job or if you work ten different jobs and you make $10,000 at each job totaling a $100,00, both
those people will pay the exact same amount in taxes because they both made a $100,000. The irs
only looks at one number- that's your total income that you made. There's no special overtime tax.
Whether you obtain that income from working your regular job, or working six different jobs or
working a ton of overtime it all gets counted as income. So for example, if you have one person
whose base salary is $50,000 dollars a year and they work a little bit of extra overtime and they
end up with $60,000 dollars; So they made an extra $10,000 dollars in overtime that year...
Compare that to a person who has a base salary of s$60,000 dollars and they don't work any overtime.
At the end of the year they both made $60,000 dollars but one worked overtime and one didn't...
Which one pays more taxes? They both pay the same amount of taxes because they both made $60,000
dollars. It doesn't matter how they got there. If we're talking about overtime being worth it
in the sense of just money, so I'm not talking about how it affects your family or anything
like that. Obviously yes the more money you make the more you will pay in taxes because you're
bringing home more money. But if we're going to say that it's not worth it to work extra overtime
to make more money then why would we ever want to get a raise because that's also going to cause us
to make more money and pay more taxes. Or better yet, why do you even have a job because if you
made $0 dollars per year you wouldn't pay anything in taxes. It's not like you get taxed at 15%
for your regular pay and then all of a sudden when you work overtime you get taxed at 100%,
it doesn't work like that. You're still gonna take home the majority of every dollar that you make
whether it's overtime money or regular money. So if you work and you get an extra dollar of
overtime you're probably still going to take about 76 cents of that dollar home with you after taxes.
So let me put this in an easier example for you. So let's say you make $30 an hour this
is going to put you in the 22% tax bracket. So if you if that $30 an hour gets taxed at 22%
your take home pay is going to be $23.40 an hour and if your overtime rate is time and a half
you'll get paid $45 an hour. You're making more money so you're going to pay a little bit more
in taxes. It's going to put you in about the 24% tax bracket meaning per hour your take-home pay is
going to be $34.20 for overtime. So working that extra overtime hour and making $34.20 but paying
about $10 bucks in taxes...yes you did pay more in taxes but at the same time yes you did make
$34.20 more take home than if you had just been sitting at your house making $0 dollars an hour.
So in order to understand this you need to know that our tax system functions as a "progressive"
system. It's not a flat rate, everyone doesn't pay 15% of every dollar they earn. If you hear
someone say something along the lines of I'm in the 22% tax bracket that doesn't actually mean
that they pay 22% percent tax on everything they make. They actually probably paid a lot
less than 22% percent on most of the money they made and here's why... because this is where the
main confusion comes in so stick with me! For this video and these examples I'm going to use the U.S.
income tax rates of 2021. If you were to file as a single person: a progressive system means
the first dollar you made to the $9,950-th dollar that you made you pay 10% tax on that. From $9,950
to $40,525-th dollar you made you paid 12% tax. So you didn't pay 12% tax on everything yet,
you paid 10% and then when your income got over $9,951 you paid 12% and from $40,526
to the $86,375-th dollar that you made you paid 22%. So if your salary... (don't miss this guys)
If your salary is $86,375 dollars you do not pay 22% on $86,375 dollars. You still paid 10%
percent on the first $9,950 you made then you went ahead and you paid 12% percent from $9,950
to $40,525. The only thing you paid 22% percent on was the money from $40,526 to $86,375. And it
progressive like this the more money you make. From $86,000 to 164,000 it's 24%. From $164,000
to $209,000 it's a 32% percent. From $209,000 to $523,600 it's 3%. And anybody that makes more than
$523,601 dollars is going to be taxed at 37% for the income they made over $523,600. If we have
someone that makes $600,000 they're not going to be taxed at 37% for the entire $600,000 dollars.
Compare this to someone who makes $50,000. The $600k dollar guy and the $50k dollar guy, from $0
dollars to nine $9,950 they were taxed exactly the same at 10% percent. The only money that
the $600k dollar per year guy gets taxed at 37% percent is anything he made over $523,601 dollars.
So this is exactly why we have this myth about a buffer zone because people don't understand that
it's progressive. Like I was just explaining, so for example there is no such thing as a buffer
zone where if you were to make $86,375 and then you worked an extra eight hours (of Overtime) boom
all of a sudden you moved your entire income into another tax bracket and now that changes
everything. No longer are you paying 22% but you just changed your entire income to 24%
and by that reasoning that extra eight hours that pushed you over into the next tax bracket screwed
you because it made it all not worth it and it actually made you lose money. But that's not how
it works the only tax you'd pay more than 22% on is every dollar over $86,375. You're not paying
more money in taxes because you worked overtime, you're paying more money in taxes
because you're taking home more money. There's no specialty overtime tax like we talked about.
So now some of you guys though are going to say well how come when I work so much overtime my
paycheck only goes up a $100 dollars and all these taxes come out. So this has less to do with how
much you're paying in taxes but more to do with how much your employer is withholding in taxes.
We have to understand WITHHOLDING... so how many of you know that you actually only pay
taxes one time per year and you have to pay them by the april 15th deadline. You don't
pay taxes every single paycheck. Taxes get withheld every paycheck. So to put it in simpler
terms your employer is basically saying well hey I'm going to withhold 25% of your income of every
single paycheck and put it in a bank account. Where you can't touch it and it's specifically
designated for that tax deadline on april 15th and they do this because how many people if you got
everything that you made with no taxes, you would spend it all and then by the end of the year when
the tax bill comes and you owe $25,000 dollars you wouldn't have a single thing in your bank account
to pay the $25,000 dollars. In order to prevent that they're basically forcing you to save for
your tax bill at the end of the year. So there are a couple rare exceptions of people that don't pay
just once a year, usually you pay quarterly and this is going to be common for someone who's
self-employed or if you have a repetitive behavior where you owe at least $1,000 or more in taxes
but generally speaking everyone's going to pay taxes once a year. So now that we understand
withholding let's go back to the paycheck where you're not bringing home as much as you thought
you would working overtime. So most companies have an automated computer software system
that is deciding how much is an appropriate amount to withhold every paycheck so normally for example
if you get paid a $1,000 dollars a paycheck and you get paid every week the software is
going to look at the paycheck and go... "okay this person makes a $1,000 a week he's on track
to make $52,000 dollars this year which means he's going to pay such and such amount of taxes
and we have 52 times to save up for this so we need to withhold this much money
every single paycheck...." So then let's say the next week though you do 27 hours of overtime and
that's in addition to your normal hours and you're expecting to make $2,000 dollars on
your paycheck that week but what can happen is the software then looks at it and goes
"Hold on a second this guy's making $2,000 dollars a week which means he's on pace to make a $104,000
dollars this year so we need to withhold the same amount of money as anyone else who was making a
$104,000 dollars this year oh and by the way we've been under withholding a certain amount because we
thought he was going to make $52,000..." So they might end up withholding a lot of money to protect
you, is the idea of it because they can't predict how much overtime you're necessarily going to work
week to week. Now of course if your employer withholds too much money when you file that
tax return by april 15th that's when you get money back. That's how people get money back is because
throughout the year the employer pulled in too much money so you will get that extra money back.
But if it really is bothering you or it's irregular and you can't plan for it.
You can redo your W-4 form if you're having issues with getting hammered as far as the
amount of taxes they're withholding. And when you redo your W-4 form you can
map out how much you want withheld from each of your paychecks. Just be careful you're not
redoing your W-4 form so you're going to end up owing money at the end of the year.
So if you're working overtime and we're just talking about the number side of it,
yes it is worth it because it's going to bring you extra money and it's
not going to affect at all... it is not going to affect the money you have
already made. There's no special overtime tax it all gets taxed the same, yes you're going to
pay more taxes that year but that's because you're taking home more money that year.
Thanks for watching guys I hope this clears up the misconceptions about overtime and tax brackets
and you have a little bit of understanding. Please go ahead hit the SUBSCRIBE button if
you learned anything please hit the LIKE button, I appreciate it! I'll see you guys next week.