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May 16, 2024 10:22 AM   Subscribe

Why is my tax rate varying pay period to pay period? Already accounting for changes in tax bracket but still not understanding. My employment and tax situation has always been very simple, so please explain to me like I'm 5 if I'm missing something. Thanks!

After a brief period of unemployment, I began work as a W2 freelancer (meaning they take out taxes but I don't get any benefits) for the first time at the beginning of January this year. I am an hourly employee and don't get paid for time off or holidays or slow time so the amounts on my paycheck also change. I don't have bonuses or anything other income outside of my hourly pay.

Each pay period my rate of taxation is varying wildly. There doesn't seem to be any rhyme or reason to it (whether or not I jump into a new tax bracket, see below). I do 0 withholding, which I know means I get taxed more up front but I'm struggling to understand why the rate changes all the time. I have Federal, NY State, and NYC taxes. I've contacted my company's payroll department to understand more, but I'd love to understand if there's something obvious I'm missing? Or if this seems like a glaring mistake to anyone?

I'm used to being a fulltime employee where basically every check is the same other than potential variation in which retirement and health premium funds are pulled from the paychecks, but that's been very transparent to me and those things are being not pulled from my paychecks now.

So what's the deal? For example, when looking at below, why would I be taxed 44% in the last pay period, and 30% in the prior, then back up to the 36% the period before that? Seems weird, no?

Period 1 36% (Tax bracket 1)
Period 2 36% (Tax bracket 2)
Period 3 39% (Tax bracket 2)
Period 4 36% (Tax bracket 2)
Period 5 42% (Tax bracket 2)
Period 6 36% (Tax bracket 3)
Period 7 30% (Tax bracket 3)
Period 8 44% (Tax bracket 3)
posted by greta simone to Work & Money (12 answers total)
 
Where are those percentage figures coming from? If you broke down all of the withheld money into separate line items it might become more clear.
posted by seanmpuckett at 10:32 AM on May 16, 2024


Best answer: The rate is changing because the payroll processing software is looking at every check's gross pay individually, multiplying it by the number of pays in a year, and doing your W-4 withholding setup based on the assumption of that amount as your annual salary.
posted by phunniemee at 10:33 AM on May 16, 2024 [8 favorites]


Response by poster: The rate is changing because the payroll processing software is looking at every check's gross pay individually, multiplying it by the number of pays in a year, and doing your W-4 withholding setup based on the assumption of that amount as your annual salary.

WTF. Why wouldn't it tax me at my actual YTD amounts instead of assuming each pay period is representative of forever? I'd love to see some kind of info about this general policy to read up on. Googling isn't helping.
posted by greta simone at 10:47 AM on May 16, 2024


Best answer: Well think of what that would imply. You'd start out the year withholding no tax at all. Then a little tax. Then a little more. Then more and more and more as the year goes on. Your take home net pay would dwindle as the year goes on, trying to pay off your tax debt from the first half of the year.

Or if you change jobs mid year. Your YTD is low before you leave your first job, and then maybe you only half a few months of earnings at your new job before the end of the year (not enough for your full tax burden to "kick in"). Now the tax year is over and you've withheld almost nothing, and you have a huge tax bill due.

There's not really a perfect way to do this, so the software is doing what is standard for payroll software to do, because it's the best and most efficient solution to this problem.
posted by phunniemee at 10:53 AM on May 16, 2024 [6 favorites]


You might be able to request that they tax you at a certain rate, based your expected annual pay. This is a variation of letting you choose how many deductions to take. It is useful for people who cofile with a spouse, and don't want to under/overpay.
posted by Winnie the Proust at 10:53 AM on May 16, 2024


Best answer: Also, just a note, it isn't taxing you at this rate. It's withholding for you. At the end of the year when you do your taxes, your tax rate is whatever your tax rate is based on your total income and life circumstances. The tax that's being withheld for you is meant to offset what you owe. If the payroll software overshot its guess, you'll get money back from Uncle Sam just like in the past when you were salaried and withheld more than necessary.
posted by phunniemee at 11:03 AM on May 16, 2024 [6 favorites]


Response by poster: Thank you phunniemee, that final answer was going to be my next question. Bc it feels like this method means I should get a good refund assuming my actual income ends up being less than my projected income based on the last pay period.
posted by greta simone at 11:16 AM on May 16, 2024


Yes, especially if you're doing something like working "full time" for 2 weeks, then taking a few weeks with no work, then log a bunch of full schedule hours again. Over the course of the year your actual work and income is effectively part time, but the individual paychecks at a single glance look like full time work and pay.
posted by phunniemee at 11:19 AM on May 16, 2024


The payroll software is behaving normally. Anyone with wide variations in income between different pay periods will have the same experience (unless they're claiming enough deductions that their tax rate is always zero... then it's a lot more stable).

So everyone is telling you that correctly.

However, you said something else that concerns me. You called yourself a W2 freelancer... and there is no such thing. Someone being paid whose income will be on a W-2 at the end of the year is an EMPLOYEE, and the employer is required to take certain things out - social security & medicaid taxes, workman's comp, etc.

A freelancer/independent contractor is SELF-EMPLOYED. Taxes may or may not be taken out of those checks (this is sometimes optional, as in they ask if you want them to). This income will appear on a 1099 at the end of the year, and you file taxes accordingly.

There are laws that determine which sort of work it is; it's not up to the entity you're performing work for to randomly decide. But because there are tax implications, it's important to know which you are - or you could find yourself owing more in taxes at the end of the year than you expect. (It's also important to know if a business is playing games/ignorant and calling you a freelancer/independent contractor when you really should be classified as an employee and have the protections of an employee.)

You also called yourself a freelancer in January, but in today's post, you also call yourself an "hourly employee"... so I can't make a guess from what you've posted as to which classification is correct, but you need to know the difference and which you are.

To me, it sounds like one of two things: 1) you lack the understanding of the difference, and so your word choices make things sound hinky, despite being correctly classified, or 2) the company you're working for has you classified as an independent contractor, when you're really an employee. #1 isn't a dig; if you don't have experience with it, you don't have experience with it. It's #2 that worries me, because it could end up having a nasty impact at tax time if you're not aware the taxes you'll pay are different. (And if you're not aware that as self-employed, there are things you could be keeping record of so you can use them as business deductions!)

Here's a couple links from the IRS about it: Worker Classification 101 and Publication 1779. For more research, just google something along the lines of "employee or independent contractor".

If you already know all these and it was just the wording - forgive me. I'd rather speak up and look foolish than risk you getting screwed if I could have warned you.
posted by stormyteal at 11:31 AM on May 16, 2024 [4 favorites]


Response by poster: @stormyteal

I'm aware of the distinctions, and yes while I'm classified as an employee on W2 due to the fact that yes they take out take out taxes and SS/medicaid/WC etc.

I call myself a freelancer bc I get no benefits and can leave at any time and cobble together work month to month. I happen to keep getting renewed at this employer every month so they've been my only income for the moment, but I could pick up other work as well without issue.

But let me assure you everything is above board with this employer and my status, I just wanted to understand how the tax rates worked and phunniemee clarified that for me. I would love to see a written explainer about this somewhere just to refer back to if anyone has an IRS page (or some other legit group) to refer me to.
posted by greta simone at 11:45 AM on May 16, 2024 [1 favorite]


For resources, there's this IRS withholding calculator, which allows you to put in a variety of life circumstances to let you know what to put on the W4 form for the most accurate withholding. If that's useful.

In your searches, perhaps use the term "part-time'' or "temporary worker", rather than freelance. Since, if you include "freelance", you get info mostly directed toward 1099 independent contractors.
posted by hovey at 12:02 PM on May 16, 2024


Since it seems to me this question and especially the answers are all about perspective, I will just mention this as another perspective: I and my wife are fully retired, we get different Social Security payments because of different benefits. We voluntarily have a different percentage withheld from each SSA monthly payment. Now, I will soon be eligible for monthly pension payments from a prior, prior employer and I asked my CPA to figure out what withholding should be done for this new income flow, which turned out to be zero because of the exact Federal and State laws, exactly what percentage we are having withheld on each SSA monthly payment, our total income from ALL income sources and the EXACT law regarding pensions in our state, our ages and the RANGE that our total income falls in.

So I guess I'm saying that the payroll software makes simplifying but probably to your benefit (vis taxation) withholding assumptions for your payroll. In retirement we are now "in the weeds", and PLEASE don't even mention Mandatory Retirement Distribution which will start when we turn 73.
posted by forthright at 1:13 PM on May 16, 2024


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