Have you ever figured out what percentage of your gross income you pay in federal tax?

Should this number include SS and Medicare taxes?

Probably more than the billionaire Warren Buffett.

It is not as simple as dividing one number into another. That is because it is not tax on income, but tax as a percent of income.

And, it is not figured on gross income because you are never taxed on gross income. Your tax is calculated on taxable income, line 43.

In your example, $40,000 of income. Since the tax is not figured on $40,000 you have to determine with a the taxable income is. So, let’s assume the $40,000 is the taxable income.

The calculation is done this way.

The first $8,925 is taxed at a rate of 10%
The amount between $8,925 and $36,250 is taxed at 15%
The amount between $36,250 and $40,000 is taxed at 25%

Let us also assume that your gross income was $55,000. For the sake of tax brackets you would be in the 25% bracket, but since tax is not figured on the gross amount, but taxable income, ($40,000,) you would find the above breakdown would give you a tax as a percent of income of 14.82%, not 25%

The tax as a percent of income will always be lower than the gross tax bracket. In your example, you can not divide the tax you paid into your gross income to determine the tax as a percent of income.

@Wealthadvisor I would think it is obvious I know we are not taxed on total income, I clarified that in my question. I know how the brackets work, most people don’t, that is another reason I asked the question.

Most people think in terms of gross income. If they make $50k and believe the government takes 30%, I think a lot of people are not considering all the deductions.

@Wealthadvisor I know what I paid in Federal payroll tax that number is on my W2 and I also have the tax amounts I paid quarterly and finally with the adjusted tax I had to pay based on my K1. So can’t I just add those taxes up and divide it by my gross income to get the percent @JLeslie is asking for?

About 17%.

It is not as simple as dividing one number into another.

Yes, it is if you take the bottom-line tax paid / gross income.

@JLeslie isn’t proposing a way to calculate your taxes. It’s a look at your taxes after they’ve been calculated in the way you described.

The tax brackets you described are something very few people understand. There is a very wrong and very common belief that increasing their income will reduce your take-home.

Mine is complicated because my earnings come mainly from a business and are based on the K1 profit statement.

What @Cruiser said. If you also consider what is taken from my checks for Social Security (which I will never see, so I am paying into something that will not benefit me), Disability, federal, state, and Medicare, then my percentage was around 33%.

If you took the $8,000 you owe in taxes, (calculated from the tax table) and divided into your gross income, you would not get the correct answer. You would need to divide it into your taxable income to get an approximation of your tax as a percent of income, but it still would not be correct.

You need to do the calculations as the tax as a percent of income to get your percent of tax.

You would be amazed at how many people think their tax bracket based on gross income determines their tax bracket and thus that is what the percent of tax they pay.

@Wealthadvisor You are missing the point of the question.

@GloPro is correct. If you start to calculate Medicare and Social Security, plus the first 7.5% of taxable income that is not allowed, plus the first 2% of miscellaneous deductions that are not allowed, plus the first 2% of business deductions that are not allowed if you use form 2106, you will find a much different number.

@dappled_leaves . His calculation of $8,000/$40,000 gives an answer that has nothing to do with the tax a percent of income. It just gives him a number 20% that has nothing to do with anything related to how taxes are calculated.

@Wealthadvisor The question is not about how taxes are calculated.

@Wealthadvisor The question is not about how taxes are calculated.

It would seem that you need people to explain this to you multiple times.

If I take my adjusted gross income and divide the amount of tax I paid (form 1040) I get 28% Federal Tax and if I do the same to my state return I get another 5% for a total of 33% of my income went to state and federal taxes. Adding in SS and Medicare takes it up to 34.3%

@Cruiser Just be glad you avoid the self employment tax on the sub S income.

@Adirondackwannabe I didn’t. I am a S Corp and why my tax rate was so high. Next year I am determined to use better tax more aggressive tax shelter planning to bring down my taxable income. My goal is to be down near Obama’s 17% tax rate.

@Cruiser That doesn’t sound right. Go back and look and see if there is anything on line 56 on your 1040. Your accountant shouldn’t be figuring self employment tax on the S income. Just the income tax. Your tax rate is high because you make good income. But that’s why you’re in business.

@Adirondackwannabe you were right….nothing there.

Good, that’s one of the real advantages of S corps over partnerships or sole proprietors.

17.6% (UK) Lower than I imagined it would be.

@cruiser I forgot to answer you about SS. At first I was thinking don’t include it, I still think that is probably the number I really want to work with, but probably both numbers are interesting. On my 1040 I used line 22 and line 61. Mine is 24%. I don’t think that includes SS right? Or, is SS included in box 2 of the W2? I actually am not sure now that I think it through. Too long since I studied accounting or did my own taxes. I’m pretty sure SS is not in that number. My adjusted gross happens to be the same as my gross.

@Wealthadvisor I’m not sure why you are having trouble understanding what I am interested in. I was hoping other people would find the exercise interesting too. They certainly can work the percentages using a bunch of different numbers if they are interested. No matter what I think people will guess wrong about the total percent they actually ay whether it be based in total income, adjusted income, or even after the exemptions. Most people in America just did their taxes so all the numbers are easily pulled fom their tax form.

My effective tax rate is 7% federal (roughly half my marginal rate), and my state has no income tax. I’d have to go home and look at the numbers again for a more complete breakdown, but I know for certain that effective rates are considerably lower than marginal rates in all brackets.

@JLeslie . I guess my initial response to the question missed the mark because I am not used to seeing the question, “I’m interested in what you pay as a percentage of your total gross income. Include interest income, the whole total total. I don’t know what line it is on the tax forms. Do you know the percentage? If you calculate it now, are you surprised by the number? Higher than you guessed? Lower.”

The part about what line is it on the tax form threw me off because there is no line on the tax form that figures that number.

If you use Turbo Tax to do your taxes, there is a calculation done that determines your effective tax rate. Of course, Turbo Tax does not show how that number is calculated, but I believe it takes into account all aspects of the tax calculation. @jerv used the terminology, effective tax rate, in his response.

@Wealthadvisor I wasn’t looking at my tax for amd people use different tax forms so I just tries to describe what I was asking for as best as possible. I was giving the math, I was not looking for the math.

I wound up usuing line 22 and 61 of the 1040 as I mentioned above. People from other countries wouldn’t even use our forms, so the line doesn’t matter. A lot of people say they give 50% of their salary to the government. I also hear a lot of people worrying about their tax bracket. If they do the math they see they pay less than they think. At least that was my guess people would estimate high. People don’t walk around saying I make $40k, but I get a $6,000 exemption and I put $5,000 in my 401k, so I am in the 15% tax bracket, etc etc. I think most people don’t really know what they actually pay compared to what they think they pay. I wouldn’t know myself without actually doing the math. We have to do that math, the tax form doesn’t do it. Even if we want to compare it against our adjusted gross we need to fugure the math if we are in the 2nd+ tax bracket, because the tax gets higher over the bracket amount, so to get the average we pay in tax, the actual percent on adjusted income, you have to do the math. This year we had a much higher income than usual and nothing to write off or lower our taxes.

Sorry for all the typos above.

@JLeslie I really don’t know where this idea of marginal tax brackets came from in the first place. Your marginal tax bracket has nothing to do with how much tax you pay.

For example, a married couple with gross income of $400,000 is in the 35% marginal tax bracket, but the tax as a percent of income is before deductions 27.09%.

The IRA and the 401(k) are probably the most confusing to most because they are tax deferred accounts, not tax free accounts. You would be surprised how many tell me how the money inside a 401(k) or IRA grows tax free.

While both can reduce taxes now, there is the piper to pay on the other end, usually in the form of more tax than you got credit for unless you did a terrible savings job.

For example, when most start working, they are usually in the 15% tax bracket. When they get to Required Minimum Distribution time, (701/2,) that distribution added to pension, Social Security, interest and other forms of income will most likely put them in a higher bracket than 15%. So the find themselves giving more back in taxes then they got credit for. If they have put the maximum each year in their 401(k), their account balances at retirement can be so large as to put them into a higher tax bracket by itself. Not to mention the government constantly adding tax brackets or raising them.

Plus, if you use investment accounts inside the 401(k), then all the capital gain earnings are taxed at ordinary income tax rates and not capital gain rates.

@Wealthadvisor I know all that. I don’t even get the tax break now on my IRA money, we make too much. The only break I get is not paying on the interest earned. I was just interested in knowing if people felt they paid more or less than they thought in taxes. I tried to give very simple math so anyone could figure it out. I was trying to get a feel for how accurate people are in their heads about the tax they pay. I am not concerned on this Q with how taxes are actually figured and how all the write offs, loop holes, and tax shelters work. I already know all the basic ones, we use them all.

@JLeslie I suppose it matters little now; the question has been derailed beyond all hope.

@dappled_leaves Yes it has. Possibly also not too many people were interested in the question to begin with. We got a few answers.

One thing I did forget is that pre-tax deductions mean my reported gross is only ~90% of my actual (wage times hours) gross. That can skew the numbers a bit too.