How can I calculate point of diminishing returns for overtime net pay after federal taxes?

Question

How can I calculate point of diminishing returns for overtime net pay?

Workers earn a base pay of $26.55 per hour for a 40 week. Some workers work as much overtime as they can get, others only work 10 of overtime or less. The reason has caused a debate over the point of diminishing returns for working over time due to the amount of taxes that is taken out of the pay check after 10 hour. Basically it seems that the ratio between net pay and hours worked starts to drop after 10 hours. This is due to tax brackets, and the tax brackets are based on the IRS formW4 exemtions claimed.

So how do I get the numbers for the tax brackets based on all combinations of exempts, so that I can make calculations for point of diminishing return? I want to be able to graph hours worked and net pay after taxes.

Gross pay is ease to figure
40 hours x 26.55 x 1.0= $1062 (no overtime gross)
45 hours x 26.55 x 1.5= $1792 (5 hours of overtime gross)

how do i apply the federal tax withholdings?

Answer 1

I can understand that if, within a pay period, you work enough overtime hours, your withholding might be at a higher rate than if you hadn't worked as much or any overtime. However, one point you seem to miss is that your tax liability (what you ultimately owe before withholding is accounted for) is only determined on an annual basis. I have yet to see a situation occur where the more a person works (on an hourly basis with overtime), he takes home less. The withholding can never amount to 100% of the additional income for that extra hour worked, unless you request unusually large specific dollar amounts to be withheld via a temporary Form W-4 filed with your employer. It is true that the more a person earns annually (and even within a pay period), the higher his top marginal tax bracket will be. However, the higher tax rate only applies to the last dollars earned--never to all the dollars earned as one moves through the rate schedule brackets.

Publication 15 contains the Federal income tax withholding tables for 2007. Using a spreadsheet program and these tables, you should be able construct the example you desire. The Wage Bracket method tables already have withholding levels for various withholding allowances up to 10, and the instructions on page 35 show you how to handle those over 10. For the Percentage tables the look-up amounts already have withholding allowances deducted from earnings (each one is a certain dollar amount depending on filing status). This seems to be a project that would take some effort. If it were me, I'd realize that the more hours I work the more net pay I take home (even if the extra dollars have a higher rate of tax withheld from them). Your real goal should be to gauge your withholding so that you don't owe a lot at the end of the year, and don't provide the IRS with an interest-free loan by having too much withheld.

Here's the link for Publication 15. Your state should have similar tables available online.

http://www.irs.gov/pub/irs-pdf/p15.pdf

Answer 2

If overtime takes you to a different tax bracket, you only pay the higher rate on additional earnings, it doesn't change what you pay up to that. The highest rate is 35%, and you only hit that for income over $336,550 if your filing status is single, head of household, or married filing jointly, so that's probably not a big issue for you. So since extra income doesn't cause you to pay more taxes on what you've already earned, and in any case even at the highest brackets you get to keep most of the additional money you earn, there isn't a point at which it costs you money to take the overtime.

If you work a lot of overtime in one pay period, your withholding might go up a lot, but you'll get some of it back at tax time unless you make that much almost every pay period.

Answer 3

No. You can deduct state taxes on your federal return, but not the other way around.