Pay raise FAQ

Bracket creep is what happens when a raise pushes part of your income into a higher marginal tax bracket. Only the dollars above the threshold get taxed at the higher rate, not your whole income (this is the single most misunderstood part of the US tax code). For a 2026 single filer, the jump from 22% to 24% happens at $105,700 taxable income. If a raise takes you from $100k to $110k gross ($93,900 taxable after the $16,100 standard deduction), only the last $4,300 hits the 24% bracket. Not all $110k.

Marginal is the rate on your next dollar earned. Effective is your total tax divided by total income. For a single filer at $100k, marginal is 22% and effective (federal only) is about 14%. When deciding whether a raise is worth it, marginal is the right lens because every raise dollar is taxed at that rate. When comparing year-over-year tax bills, effective is the right lens.

A bonus is taxed the same as regular income when you file. But it's withheld differently. The IRS lets employers use a flat 22% supplemental federal withholding on bonuses up to $1 million (37% above that). If your marginal rate is below 22%, you'll get some back at tax time. If it's above, you'll owe. A raise just increases your regular payroll withholding at your W-4 rate. Net-net, same tax at year-end; different cash flow during the year.

Annualize: hourly rate × hours per week × 52 = annual gross. $25/hour at 40 hpw = $52,000/year. Use the calculator's hourly toggle and it does this for you. Caveats: overtime (1.5x rate above 40 hours in most states), unpaid time off, and seasonal schedules all break the pure 52-week assumption. Full breakdown in hourly to salary math.

RSUs are taxed as ordinary income at vest based on the fair market value that day, then capital gains on any appreciation after. When evaluating a raise that includes RSU refresh grants, look at 4-year vested value at current stock price as one scenario and at a 30% discount as a pessimistic scenario. Public-company RSUs are close to cash; pre-IPO RSUs are lottery tickets. Do not include pre-IPO RSUs in your budget.

Overtime (1.5x regular rate in most states for hours over 40) is still taxed as ordinary income, just at your marginal rate like any other wage. A raise that bumps your base rate also bumps your overtime rate. If you pull 10 OT hours a week at $25/hour, a raise to $27.50 adds $375 gross per week (~$19,500/year) on top of the base increase. That's often the hidden win in a "small" hourly raise.

Union step increases are usually negotiated COLAs (cost of living adjustments) plus tenure-based step raises. The tax math is identical to merit raises, but the framing matters: a "2% COLA + step" in a 3% inflation year is only a real raise if the step is at least 1.1%. Check your contract's COLA formula, some are tied to CPI-U, some to CPI-W (which ran slightly higher recently), some to a bespoke formula.

Yes, and usually in your favor. 401(k) contributions are pre-tax (traditional) or after-tax with tax-free growth (Roth). The 2026 limit is $24,500 (plus $8,000 catch-up if 50+). If you direct your raise into traditional 401(k), you reduce your current taxable income by the contribution amount. The marginal tax you would have paid on that raise stays in your retirement account compounding instead. We walk through the math in should I max 401(k) after a raise.

HSAs are the most tax-advantaged account in the IRS code. Contributions are pre-tax (income + FICA exempt if payroll-deducted), growth is tax-free, withdrawals for qualified medical are tax-free. 2026 family limit is $8,750. If your raise makes you eligible to max the HSA where you weren't before, you're effectively saving your combined marginal rate (often 30%+) on every dollar contributed. Requires a qualifying high-deductible health plan.

Flexible Spending Accounts (healthcare or dependent care) are pre-tax but "use it or lose it" annually. 2026 limit is $3,400 healthcare, $5,000 dependent care. They save federal + FICA + state tax on the contribution amount. Useful if you reliably have $2k+ in medical expenses a year (copays, prescriptions, glasses, dental). Skip if you don't, the money vanishes at year-end.

A Cost of Living Adjustment is a raise indexed to inflation (usually CPI-U YoY). Federal employees, Social Security recipients, and many union contracts get automatic COLAs. When an employer calls a 3% raise a "COLA" in a 3.3% inflation year, they are maintaining your buying power, not increasing it. That's not a raise. A real raise beats CPI. More at the COLA fight.

Promotions almost always win long-term because they shift your salary band and your next raise calculates off a higher base. A 5% merit raise on $80k = $84k. A promotion to a new title might hit $95k outright (19% bump) and next year's merit cycle calculates off $95k, not $84k. Over 5 years, the gap compounds to roughly $60k. Fight for titles, not just numbers. See is a promotion always worth it.

A raise bumps the denominator for percentage-based contributions. If your employer matches 5% of gross, a $5k raise adds $250/year to their match. State pensions (for public employees) typically calculate on "final average salary" over the last 3-5 years, so raises late in a career have outsized impact. A $10k raise at age 58 can increase a state pension by tens of thousands over retirement.

Your second job is taxed at your marginal rate on your combined income. A raise on the primary pushes both jobs' income into potentially higher brackets. Also, each employer withholds as if they're your only income, so you're probably under-withheld and will owe at tax time. Use IRS Form W-4 step 2 to account for multiple jobs, or bump withholding manually.

Do the math, 1099 income has self-employment tax of 15.3% (both halves of FICA) vs 7.65% for W-2. A $100k 1099 contract is roughly equivalent to a $92k W-2 on FICA alone, before you factor in no employer-paid health insurance, no 401(k) match, no PTO, no unemployment eligibility. Rule of thumb: 1099 rates need to be 25-35% higher than W-2 equivalents to break even, and you take on administrative overhead too.