Two People, Same Income, Different Taxes. Why?????
Why Two People With the Same Income Can Owe Very Different Taxes
One of the most common questions we hear during tax season is some version of this: “My friend/coworker/etc. make about the same amount and they pay no taxes. Why am I paying so much?”
It’s a fair and sensible question. And the short answer is… well it depends on your situation. Plus income alone doesn’t determine your tax bill. Here’s how it works.
Income is only the starting point
When people talk about how much they “make,” they’re usually referring to the top number…gross income. Taxes are different and instead, calculated after a series of adjustments, deductions, credits, and timing differences that can dramatically change the final result.
For example,
married vs single
number of kids
W2 wages vs business owner income
how much was withheld from your paycheck
and what deductions or credits apply to your situation
do you own any rental properties and what kinds
These all affect how your taxes are calculated and that’s not even considering the standard vs itemized deductions such as charity. Right, so a married couple with 3 kids, a mortgage, and two w2 jobs gets taxed wildly differently than an unmarried person that has a w2 job and rents an apartment. And don’t even get me started on a business owner with no paycheck. Right, all these things affect how you get taxed and how much.
How the income is earned matters
W-2 income, self-employment income, bonuses, commissions, and investment income are all taxed differently. For example:
A W-2 employee has taxes taken out of each paycheck throughout the year.
A self-employed person pays taxes directly and may owe at filing time.
Someone with uneven income might under- or over-withhold without realizing it.
Same income and yet very different mechanics.
Withholding is not the same as taxes owed
If one person has too much withheld, they may get a large refund while their coworker withheld too little and now owes the IRS in spring. That doesn’t automatically mean one paid more tax than the other — it just means the money moved Uncle Sam at different times.
Credits and deductions change everything
Things like:
retirement contributions
health insurance
dependents
education credits
business expenses
can all reduce taxable income or tax owed. So when comparing, if one person qualifies and another doesn’t, the difference can be significant — even with the same income.
This is why tax comparisons rarely help
Comparing your tax situation to a friend, coworker, or someone online almost always leads to frustration, especially when you’re in two wildly different life, work, and tax situations. Taxes might be math. But they aren’t intuitive, and they aren’t designed to be. They’re designed to be calculated — correctly — based on the full picture.
Hopefully this helps explain some of the confusion and frustration when it comes to your taxes. And if you’re looking for someone to file your business and/or personal returns, send us a message.
