How does high income affect your taxes?

April 21, 2022

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It’s that time of year again… tax season! Your income, side hustles and even a raise all impact if you will be getting a tax return or owing money to the government. Whether you owe or receive a tax return it is important to understand your taxes and finances. Having a deep understanding of your taxes will make completing them and knowing your return status a breeze. Keep reading to learn what factors impact your taxes. 

How Does Getting a Raise Affect Your Taxes?

Here’s how getting a raise can have an impact on your taxes. While more money in your pocket can push you into a higher tax bracket this isn’t always the case. The US progressive federal income tax system works so that if you receive a salary increase, only your added income or your raise is susceptible to the increased rates. This means your entire income isn’t susceptible to a tax increase, only your raise. Even if your raise is substantial and bumps you into a higher tax bracket, your taxes will only increase by a few percentages allowing your taxes to still be manageable and feasible.

Is The Progressive Tax System fair? 

Now the question lies: is the progressive tax system fair? The progressive tax system is put in place to impose different tax rates on different portions of an individual’s income. Higher tax rates only occur when an income exceeds a certain level. A raise is by all means a reason for celebration. Your entire income will not be subjected to higher taxes.

How much tax do you pay on an earned income?

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There are two types of taxes that are paid out for an earned income. These are Social Security and Medicare taxes and federal and state income taxes. 

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Social Security taxes equal 12.4%, however you pay half of this tax and your employer pays the other half, which means 6.2% comes from your check. The social security tax is capped at a specific dollar limit if you are making more than $147,000 a year. 

The second type of withholding is for Medicare and is 2.9% of your income. This leaves you paying 1.45% from your check and your employer matching that amount. These two taxes are only applicable to earned income and apply to those who are self-employed or business owners as well.

How does working a side hustle affect your taxes?

A side hustle and a little extra cash never hurt anybody! But, how does working a side hustle affect your taxes? Unlike a salaried position, side hustles and other forms of self employed income usually do not have taxes withheld. If you have a side hustle it is important you make a conscious effort to save for tax day. Due to no taxes being withheld, there is a strong likelihood that you will owe the government money. 

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Putting in the work before filing your taxes makes a difference

Business structures and tax deductions can seem confusing and daunting at first. Making mistakes and learning from them is inevitable. By researching before tax season or finding a qualified professional to do your taxes you’ll know what to expect when March roles around. If you need help finding a great CPA or attorney for a new business to make sure you are set-up correctly, please let us know.

Is a side hustle considered a business expense?

A salary qualifies as a business expense. This means your business pays taxes on a smaller profit and you only need to pay employment taxes on the salary that you are claiming. 

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HR, Payroll and time clocks oh my! Journey Payroll & HR has got you covered

Journey Payroll & HR offers a wide variety of services including onboarding, HR, time clocks, payroll and more. We know how important all the moving pieces are to keep your business running smoothly and that’s why we are here to help. Contact us today for a free consultation or to learn more on the services we offer. We look forward to working with you!

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