A client once told us they turned down extra work because they didn’t want to get bumped into a higher tax bracket. Not “I’m worried about the tax bill.” They actually turned down the money. And a few months later, that same client was asking about S corp vs LLC structures as if the entity wrapper would fix a problem they didn’t have in the first place.
That conversation happens more than you’d think. People are scared of a system nobody has ever explained to them properly, and that fear costs them real income.
So let’s fix it. By the end of this, you’ll understand what a progressive tax system actually does to your dollars, how to calculate your real tax rate (not the scary one), and how a single retirement contribution can drop you out of a bracket entirely.
The One Thing Almost Everyone Gets Backwards
The U.S. runs a progressive tax system. As you earn more, the percentage you pay on that additional money goes up.
Here’s the misconception: people believe that crossing into a new bracket means their entire income gets taxed at the new, higher rate. It doesn’t. Never has. If you make enough to reach the top bracket of 37% filing single, you are absolutely not paying 37% on all of it.
“If I make more money, does that put me in a higher tax bracket? I don’t want to go into another bracket.”
We hear that constantly. It’s a fair question asked from a flawed premise, and once you see how the math actually stacks, the fear evaporates.
Walking Up the Ladder, One Rung at a Time
The brackets run from 10% at the bottom up to 37% at the top. Filing single gets you smaller bands. Married filing jointly gets you more room before you hit each higher rate. Pull the current table straight from the IRS, since the thresholds shift every year with inflation.
Now let’s put a real number through it. Say you’re single and you made $100,000. Using the 2025 bands:
| Slice of income (single filer, roughly) | Rate applied |
|---|---|
| First ~$11,000 | 10% |
| ~$11,000 to ~$48,000 | 12% |
| ~$48,000 to $103,350 | 22% |
| Above $103,350 | 24% |
Your first roughly $11,000 gets taxed at 10%. The chunk from there up to around $48,000 gets taxed at 12%. Everything from $48,000 up to your $100,000 gets taxed at 22%.
Three different rates. One income.
But notice something in that table. The 22% band doesn’t stop at $100,000; it runs all the way to $103,350. So if you’re sitting at $100,000, you’ve got room before the 24% rate touches a single dollar of your money. And when it does, it only touches the dollars above that line.
Marginal Tax Rate vs Effective Tax Rate
This is where the confusion clears up for good.
Your marginal rate is the rate on your next dollar earned. It’s the bracket people fixate on. It’s also the least useful number for understanding what you actually pay.
Your effective tax rate is your real rate, the one that reflects what actually left your bank account.
The calculation is simple division:
Total tax owed ÷ total income = effective tax rate
Back to our example. You made $100,000. Your preparer tells you that you owe $15,000. Run the math: $15,000 divided by $100,000 gives you 15%.
Fifteen percent. Not 22%. Not 24%. Fifteen.
You can turn it around, and it holds: 15% of $100,000 is $15,000. That’s your true tax rate, and it’s the number worth tracking year over year.
Most people have never calculated this. They walk around quoting their marginal bracket like it’s their tax rate, then make decisions based on a number that overstates their burden by a wide margin. Knowing your effective rate is the difference between planning and panicking.
The $10,000 Contribution That Buys Back a Bracket
Understanding brackets is useful. Using them is better.
Say you’re at $110,000 filing single. You’ve crossed the 24% line, so a slice of your income is now getting hit at that rate. You call your accountant and ask what you can do to lower it.
Here’s one of the cleanest moves available: contribute to a 401(k) or retirement account.
Put $10,000 into a traditional 401(k). That contribution gives you a deduction against your income, so your $110,000 in earnings becomes $100,000 in taxable income.
What just happened?
- You dropped that top slice of income out of the 24% band entirely.
- Your highest applicable rate went back down to 22%.
- You saved roughly $2,000 to $2,300 in tax, give or take on the math.
- The $10,000 is still yours. It’s sitting in your retirement account.
That last point matters most. This isn’t spending money to save money. You moved it from one pocket into a better pocket, and the government gave you a discount for doing it.
Retirement contributions are one strategy among many. Deductions, timing, entity structure, and credits (which work differently than deductions, and that’s a separate conversation) all stack into a real plan. But if you want a single high-leverage move that most people underuse, this is it.
You’re Already in Every Bracket Below You
Here’s the reframe that finally makes it click for clients.
Someone comes in and says, “I’m in the 24% bracket, how do I get out of this bracket?” The honest answer is that you’re not just in the 24% bracket. You’re in the 10% bracket, and the 12% bracket, and the 22% bracket. You’re in all of them simultaneously, because your income passed through every one of those bands on its way up.
The 24% is just the last stop.
You might be barely into it, a few thousand dollars over the line, meaning a tiny fraction of your income is exposed to that rate while the vast majority is taxed at 22% and below. Or you might be deep into it. Big difference in outcome, same bracket label.
So the goal isn’t to escape the bracket. The goal is to lower your taxable income strategically and know your effective rate. Everything else is noise.
Should you want to pay less tax? Absolutely. We help clients do it every year. But the mentality of avoiding income to avoid taxation is backwards, and it’s one of the most expensive misconceptions in personal finance. You should want to make money. Make the money, then plan around it.
Where Entity Structure Actually Fits In
Now, about that S corp vs LLC question that always shows up next.
Business owners hear “tax bracket” and immediately jump to structure, hoping there’s a legal wrapper that makes the brackets stop applying. There isn’t. The progressive system is still the progressive system. What structure changes is how your income flows to you, which pieces are subject to which taxes, and what deductions and retirement vehicles you get access to.
Structure is a real lever. It’s just not the first one. The sequence matters:
- Understand your actual numbers. Effective rate, taxable income, where you land in the bands.
- Use the deductions and retirement vehicles already available to you. Most people leave money here before they ever look at restructuring.
- Then evaluate structure with someone who has your full picture in front of them.
Doing step three before steps one and two is how people end up paying for a structure that costs more in compliance than it saves in tax.
But How Much Does It Cost to Start an LLC?
It’s the question everyone asks, and it’s the wrong first question. The filing fee is rarely what determines whether the move was smart. What determines it is your income level, your profit, how you pay yourself, and what you’re trying to accomplish over the next few years.
Cheap to set up and wrong for your situation is still wrong. Get the analysis first, then worry about the fee.
Where This Leaves You
The progressive system isn’t a trap. It’s a ladder, and every rung only applies to the income sitting on that rung.
Three things to do with this:
- Calculate your effective tax rate. Total tax divided by total income. Do it for last year right now. That number, not your bracket, is your real rate.
- Look at your retirement contributions before year-end. A $10,000 traditional 401(k) contribution on $110,000 of income drops your taxable income to $100,000 and saves you somewhere around $2,000 to $2,300. Same money, better pocket.
- Stop treating brackets as thresholds to avoid. You’re already in all of them. Earning more never leaves you with less after tax.
Pull up the current IRS bracket table and find where your income lands. Then find out how much of your income is actually sitting in that top band, because for most people it’s a much smaller slice than the fear suggests.
Make the money. Then make the plan. That order works a lot better than the other way around.
About The Author:
Cameron Botes is the founder of BizBud, a tax and accounting firm built for content creators, influencers, digital nomads, and entrepreneurs building businesses across borders. A former professional soccer player across four continents, Cameron brings the same discipline, preparation, and pressure-tested execution from his athletic career into helping business owners plan ahead, stay compliant, and keep more control over their financial future.
Since founding BizBud in 2020, Cameron has grown the firm from a one-person practice into a team of CPAs and tax advisors serving hundreds of clients across the U.S. and around the world. With an MBA in finance and accounting, international business experience, and a team with backgrounds at firms like PwC, Deloitte, and EY, Cameron helps creators and founders simplify taxes, clean up their books, and build smarter systems so they can focus on the work they actually love.
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