The Real Value of a Raise: Why a 5% Increase Isn't 5% More in Your Pocket

You get a 5% raise from $70,000 to $73,500. You expect 5% more take-home pay. Your next paycheck is 3.8% higher. Where did the other 1.2% go? Marginal tax rates eat raises Your raise is taxed at your marginal rate, not your effective rate. If you're in the 22% federal bracket, 6.2% Social Security, 1.45% Medicare, and 5% state tax, your marginal rate is 34.65%. A $3,500 raise produces: Federal tax: $3,500 * 22% = $770 Social Security: $3,500 * 6.2% = $217 Medicare: $3,500 * 1.45% = $50.75 State tax: $3,500 * 5% = $175 Total additional tax: $1,212.75 Net increase: $2,287.25 Your take-home increases by $2,287 / $52,850 (original net) = 4.33%, not 5%. The bracket boundary effect If a raise pushes you into a higher federal bracket, the marginal rate on the portion in the new bracket is higher. But only that portion. Going from $95,000 to $105,000 means the first $5,375 (up to the bracket threshold at $100,525 for 2024) is taxed at 22%, and the remaining $4,625 is taxed at 24%. The weighted