How do tax brackets work? A guide for US employers

Understanding how tax brackets work is essential for employers that want to ensure their payroll is compliant, and their employees are accurately taxed.

In the US, the federal income tax system uses a progressive tax rate, meaning the more income an individual earns, the higher the tax rate on their earnings. But what exactly does this mean in practice? And how does it affect your payroll?

In this article, we’ll break down tax brackets, look at the current rates, and show you how the right tools can simplify your payroll runs.

What are tax brackets?

Tax brackets are ranges of income that are taxed at specific rates. Typically, these rates increase in line with income, meaning that higher income earners pay a higher percentage in taxes.

However, it's important to note that only the income within a certain range (or bracket) is taxed at that specific rate — not the individual’s entire income.

If an employee falls into a higher tax bracket, only the portion of their income that exceeds the threshold for that bracket is taxed at the higher rate.

US tax brackets (for single filers)

To illustrate, here are the US federal tax brackets for single filers in 2024:

• 10% on income up to $11,000

• 12% on income over $11,000 but up to $44,725

• 22% on income over $44,725 but up to $95,375

• 24% on income over $95,375 but up to $182,100

• 32% on income over $182,100 but up to $231,250

• 35% on income over $231,250 but up to $578,125

• 37% on income over $578,125

How does progressive taxation work?

As mentioned, tax rates typically increase when an individual earns more and enters a higher tax bracket. This is known as a progressive tax system, and is used in many countries (including the US).

In this system, income is divided into portions that are taxed at different rates. Employers must withhold taxes based on these brackets, which can seem confusing, but the concept is quite straightforward.

For example, let’s say that your employee earns $50,000 per year. Under the 2024 federal tax brackets:

• The first $11,000 would be taxed at 10% (i.e., $1,100)

• The next portion, from $11,001 to $44,725, would be taxed at 12% (i.e., $4,047)

• The remaining amount, from $44,726 to $50,000, would be taxed at 22% (i.e., $1,160.28)

So, while the employee's highest tax rate is 22%, their effective tax rate is lower because each portion of their income is taxed progressively at different rates.

Why does this matter for employers?

As an employer, you’re responsible for withholding federal income taxes from your employees' paychecks according to their earnings and applicable tax brackets. The Internal Revenue Service (IRS) provides withholding tables to help determine how much to withhold, but there’s still a level of complexity that comes with staying compliant.

Mistakes in calculating or withholding taxes can lead to costly penalties for your business, as well as stress for your employees.

With that in mind, many US-based employers — particularly those managing large teams or remote employees — face challenges in:

1. Accurate withholding: Ensuring that employees’ taxes are withheld correctly, especially when pay rates fluctuate or employees move between tax brackets.

2. Multi-state taxation: When employees work remotely or move across state lines, employers must consider varying state income taxes on top of federal tax brackets.

Year-end tax reporting: Navigating tax documents such as W-2 forms (which report wage and tax information to employees and the IRS) can become overwhelming without the right systems in place.

How the right payroll tool can help

Here’s where a modern payroll solution can be a game-changer. By automating your tax calculations, staying up-to-date with federal, state, and local tax laws, and integrating seamlessly into your existing systems, a robust payroll tool — like Remote — can massively simplify your payroll tax management.

Specifically, Remote Payroll:

• Automatically calculates your employees’ taxes based on up-to-date federal and state tax brackets.

• Handles multi-state (and multinational) payroll complexities with ease, whether your team is fully remote, hybrid, or located in different jurisdictions.

• Ensures compliant and error-free withholding and reporting, ensuring your business avoids penalties.

• Provides local, in-house guidance and support, as and when it’s needed.

The right payroll tool can also improve employee satisfaction by making sure your people are paid promptly, accurately, and with full transparency, with no surprises when tax season rolls around.

“For any business, poorly-run payroll impacts retention, sentiment, and motivation. Those are all really big. It doesn't matter that you pay your employees well if you’re not paying them correctly.”

Jonathan Goldsmith, GM Payroll at Remote

Understanding how tax brackets work is key to staying compliant. While the system is progressive, meaning that income is taxed in portions, it still presents challenges for businesses — particularly those with remote or multi-state employees.

To learn more about how Remote Payroll can make your payroll operations quick and painless, speak to one of our friendly experts today.

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