How Tax Brackets Actually Work (And Why Making More Money Is a Good Thing)
One of the biggest tax myths I hear is:
"I don't want to make more money because it'll put me in the next tax bracket."
Or maybe you've heard someone say:
"I turned down overtime because I'd lose it all to taxes."
The good news?
That's not how our tax system works. 😊
In fact, earning more money almost always means you keep more money—even after taxes.
Let's break down how tax brackets actually work!
What Is a Tax Bracket?
The United States uses what's called a progressive tax system. That simply means different portions of your income are taxed at different rates.
A common misconception is that once your income reaches the next tax bracket, all of your income is taxed at that higher rate.Thankfully, that's not how it works.
Instead, your income is divided into portions, and each portion is taxed according to the bracket it falls into.
Think of Tax Brackets Like Buckets 🪣
One of my favorite ways to explain this is to imagine a row of buckets. Each bucket represents a different tax rate.
The first bucket is taxed at the lowest rate. Once that bucket is full, any additional income starts filling the next bucket.
The important thing to remember is this:
The first bucket doesn't suddenly change just because you started filling the second one.
The same idea applies to your income. Making more money doesn't change the tax rate on the income you've already earned—it simply means the next portion of your income may be taxed differently.
A Simple Example
Let's pretend the tax brackets looked like this:
First $10,000 of income = taxed at 10%
Next $20,000 = taxed at 12%
Anything above $30,000 = taxed at 22%
Now imagine you earn $35,000.
Here's what happens:
The first $10,000 is taxed at 10%.
The next $20,000 is taxed at 12%.
Only the last $5,000 is taxed at 22%.
Notice what didn't happen.
Your entire $35,000 wasn't taxed at 22%. Only the portion that fell into that bracket was.
Now imagine you receive a $1,000 raise. That extra $1,000 would simply be taxed at your current marginal tax rate.
You still take home more money than you did before.
Why This Myth Exists
Part of the confusion comes from two terms that sound similar but mean very different things.
Marginal Tax Rate
Your marginal tax rate is the tax rate applied to the last dollar you earn.
It's the highest tax bracket your income reaches—not the rate applied to all of your income.
Effective Tax Rate
Your effective tax rate is your average tax rate across all of your taxable income.
Because portions of your income are taxed at lower rates, your effective tax rate is usually much lower than your marginal tax rate.
This is why someone might say they're "in the 22% tax bracket," but their overall effective tax rate is significantly lower.
Should You Ever Turn Down More Income?
In most situations, no. Making more money generally means you'll pay more in taxes because you earned more—but you'll also keep more money.
Simply moving into a higher tax bracket isn't a reason to avoid a raise, take on fewer clients, or turn down additional work.
There are some situations where income can affect eligibility for certain tax credits or government benefits, but those are separate considerations and not the same thing as moving into a higher tax bracket.
Putting This into Practice
Moving into a higher tax bracket doesn't mean all of your income is taxed at a higher rate.
It simply means that the next portion of your income may be taxed differently.
Understanding how tax brackets work can help you make more informed financial decisions and avoid one of the most common tax myths out there.
Don't let the fear of paying more taxes stop you from earning more income.
The goal isn't to avoid taxes. The goal is to build wealth—and paying a little more in taxes because you're earning more is usually a good problem to have.
Tax doesn't have to be confusing. My goal is to help business owners understand the "why" behind the numbers so they can make informed decisions with confidence.
