When making more actually is a real tax disadvantage?

[Anonymous]

I have always kind of rolled my eyes at people who complained about how earning more "costs" them in terms of taxes. But then this last year we experienced this and when I do the math on it, it really does not make sense.

My DH has a regular job but I am a part-time freelancer. In 2023, he received an 8% raise and I made about 16k more than I had the previous year (so from around 20k to around 36k -- now that our kid is in full-day school I have been able to boost how much I work plus clients are hiring me for more work). As a freelancer, that extra 14k is the result of a real increase in time spent working in a way that a regular raise is not. It actually reflects working basically twice as much in 2023 as in 2022 because not only did I have to bill significantly more to make that money, I also had to put in more unpaid time on developing that business plus the back office stuff I do myself -- invoicing, etc.

Last year we received a total tax refund of about 9k. Since I own my own business we have a lot of deductions, so it adds up.

This year we actually owe a small amount in federal taxes (less than $100, not a big deal) and will get just $500 back on our state refund. We had basically the exact same deductions this year as last, but between my DH's raise and my increased revenue, we bumped up enough in tax obligation that it wipes out more than half of my increase. I think I feel that more acute because, again, it's not like I got a raise for doing the same job. I literally worked twice as much. Having so much of that wiped out by taxes is depressing, especially because I'm trying to build a business from scratch and I'm still in early stages where every penny counts. It's demoralizing and I'm second-guessing my choice to do this even though in terms of my work and clients, the business feels like it's doing fairly well. I also think about how much I spend on childcare in the summer to enable me to do this and when you add that to the tax hit, it feels pointless.

Anyone else been through this? I'm trying to tell myself that I just need to push past it -- look for more ways to structure my taxes intelligently and also keep working to increase my billables. Maybe we just got unlucky in hitting an income level this year where the tax hit was just outsized compared to my income. But I'd love to hear from others who have dealt with similar issues. I'm between projects right now and should be working connections to get another project and instead I find myself wondering if I should take fewer projects this summer, save on childcare costs, and just make less while spending more time with my kid. Is that dumb?

[Anonymous]

The thing that's dumb is that you're presenting this argument in terms of your refunds for the respective years rather than your actual tax liabilities.

[Anonymous]

You had more money this year than last, yes?

What's the issue?

[Anonymous]

BTW, looking at this through the lens of comparing tax refunds isn't instructive and is really kind of dumb. A $9,000 refund could have been $750 more in your account every month instead of the lump sum at the end of the year.

You earned more, you paid more. Makes sense. The only thing that might have happened is you moved into the next higher tax bracket. But you're right -- your choices in that instance are to earn more and pay a little more in tax or earn less, pay less in tax, but have less money overall.

[Anonymous]

Anonymous wrote:The thing that's dumb is that you're presenting this argument in terms of your refunds for the respective years rather than your actual tax liabilities.

Bingo. The pp is correct. Your real tax rate/liability is much, much lower than 50%. Figure out what your DH’s tax rate is and yours and my guess is you will feel better about the extra work and $ you’re bringing in

[Anonymous]

Anonymous wrote:The thing that's dumb is that you're presenting this argument in terms of your refunds for the respective years rather than your actual tax liabilities.

The refund is a shorthand for tax liability in this case because of how I do taxes as a freelancer who is married to someone who is not. For people who have taxes taken out of their paychecks, a refund just reflects your overpayment after deductions are applied. For a freelancer, the refund is a more direct reflection of tax liability because I have to pay my taxes, including payroll taxes, separately.

[Anonymous]

I thought you were going to say last year you got 9k back (!!!!!) and this year you owed 6pm so you lost 1k. You didn’t. You made thousands more this year pre tax, and still have thousands more post tax. How are you worse off? Explain like I’m 7.

[Anonymous]

Anonymous wrote:

Anonymous wrote:The thing that's dumb is that you're presenting this argument in terms of your refunds for the respective years rather than your actual tax liabilities.

The refund is a shorthand for tax liability in this case because of how I do taxes as a freelancer who is married to someone who is not. For people who have taxes taken out of their paychecks, a refund just reflects your overpayment after deductions are applied. For a freelancer, the refund is a more direct reflection of tax liability because I have to pay my taxes, including payroll taxes, separately.

[Anonymous]

NP. You need to know your and your DH’s tax liability. Is your DH withholding enough given your new family income?

[Anonymous]

Anonymous wrote:

Anonymous wrote:The thing that's dumb is that you're presenting this argument in terms of your refunds for the respective years rather than your actual tax liabilities.

The refund is a shorthand for tax liability in this case because of how I do taxes as a freelancer who is married to someone who is not. For people who have taxes taken out of their paychecks, a refund just reflects your overpayment after deductions are applied. For a freelancer, the refund is a more direct reflection of tax liability because I have to pay my taxes, including payroll taxes, separately.

No, it isn't. It's a reflection of your husband being overwithheld (last year) and your quarterly payments. You do make quarterly payments, right?

It's not a good barometer of your tax liability or where you're hitting a marginal tax threshold.

Your payroll taxes aren't income taxes so aren't really part of this equation.

Look at total income and total income taxes paid to compare. Everything else is just illusory. Your $9,000 tax refund was financially foolish. Especially in this interest rate environment.

[Anonymous]

Anonymous wrote:NP. You need to know your and your DH’s tax liability. Is your DH withholding enough given your new family income?

???? OP needs to be making quarterly tax payments based on her revenues. This doesn't have anything to do with her husband's wage withholding.

It sounds to me like maybe she didn't make quarterly payments, her husband is still overwithheld, and they got lucky they didn't owe a lot more (and she probably owes or will owe penalties if she's not paying quarterly).

[Anonymous]

Your husband made a lot more money and so did you regardless of the extra hours. You may have moved into a higher bracket but that higher percent is only paid on the amount above the bracket threshold. If you want to pay lower taxes, reduce your income or increase your deductions. And please don’t whine.

[Anonymous]

Anonymous wrote:

Anonymous wrote:NP. You need to know your and your DH’s tax liability. Is your DH withholding enough given your new family income?

???? OP needs to be making quarterly tax payments based on her revenues. This doesn't have anything to do with her husband's wage withholding.

It sounds to me like maybe she didn't make quarterly payments, her husband is still overwithheld, and they got lucky they didn't owe a lot more (and she probably owes or will owe penalties if she's not paying quarterly).

Yes, I agree with you she should be making quarterly payments, but with an 8% raise her DH may not be withholding enough.

[Anonymous]

Anonymous wrote:I thought you were going to say last year you got 9k back (!!!!!) and this year you owed 6pm so you lost 1k. You didn’t. You made thousands more this year pre tax, and still have thousands more post tax. How are you worse off? Explain like I’m 7.

Then issue is that I literally worked TWICE as many hours this year as last year. Plus we spent 4k on summer childcare so that I would have the continuity required to do client work over the summer, which I did not do the previous year (I did some work over the summer, but had to turn down some projects because I was full time parenting much of the summer).

So between the 9k in additional taxes and the 4k in summer childcare, that's 13k. I made 16k more than I did the previous year. So total an extra 3k. To literally work twice as much.

Yes, I understand our increased tax burden is also partly due to my DH's raise. But my DH got a raise for doing the same job. He didn't get a promotion -- our family gets that money without him having to do a single second of extra work. Whereas my increase in income equals hours and hours of extra work, plus added expense (some of which is deductible but the childcare isn't).

So that's the issue. Yes we have more money this year than last. But we'd have a bit more money regardless of how much I worked because of DH's raise. I'm not suggesting I don't want him to get a raise. I'm questioning whether doubling my work efforts makes sense when so much of it gets instantly swallowed up by taxes and childcare costs.

[Anonymous]

Anonymous wrote:

Anonymous wrote:I thought you were going to say last year you got 9k back (!!!!!) and this year you owed 6pm so you lost 1k. You didn’t. You made thousands more this year pre tax, and still have thousands more post tax. How are you worse off? Explain like I’m 7.

Then issue is that I literally worked TWICE as many hours this year as last year. Plus we spent 4k on summer childcare so that I would have the continuity required to do client work over the summer, which I did not do the previous year (I did some work over the summer, but had to turn down some projects because I was full time parenting much of the summer).

So between the 9k in additional taxes and the 4k in summer childcare, that's 13k. I made 16k more than I did the previous year. So total an extra 3k. To literally work twice as much.

Yes, I understand our increased tax burden is also partly due to my DH's raise. But my DH got a raise for doing the same job. He didn't get a promotion -- our family gets that money without him having to do a single second of extra work. Whereas my increase in income equals hours and hours of extra work, plus added expense (some of which is deductible but the childcare isn't).

So that's the issue. Yes we have more money this year than last. But we'd have a bit more money regardless of how much I worked because of DH's raise. I'm not suggesting I don't want him to get a raise. I'm questioning whether doubling my work efforts makes sense when so much of it gets instantly swallowed up by taxes and childcare costs.

It's not taxes that are the issue. It's the extra time and how it costs you a lot in childcare costs. That's an issue every dual-income family with very young children has to deal with. Everyone deals with it in different ways depending on their particulars. Eventually your kids will be in school and this financial pressure won't be as much. It's just the way it is in the US.