Taxes on a Million Dollars of Earned Income

Did you know that a high income can become one’s own enemy? It can also lead to a hefty tax bill — have you ever had to pay taxes on a million dollars?

Taking a deep dive into first-world problems, we’ll see precisely how much one might pay in taxes on a million-dollar annual salary or in taxes on a million dollars of earned income over longer timeframes.

It might be a little. It might be a lot. It depends greatly on how long it takes to accumulate those earnings.

In today’s post, we’ll calculate the taxation on households earning $100,000 a year, $250,000 a year, and $1,000,000 a year as W-2 employees.




We’ll keep things consistent by looking at married couples with one income, filing jointly while contributing $37,000 a year to tax-deferred retirement plans. This could be any combination of 401(k), 403(b), and/or 457(b) contributions, as long as they have access to two of them.

They have two children under the age of 17 but are past the daycare years. They live in a state with a mid-range total state & local income tax at a flat 5% of their federal taxable income per year.

The numbers below calculated for 2020, ignoring the stimulus payments and additional child tax credits, as those one-time credits will not likely be repeated year after year.

All calculations were made with assistance from TurboTax TaxCaster. Depending on your tax situation, you may be able to file for federal and state income taxes for free with TurboTax.


Earning $1 Million in Ten Years


The combined salaries in our first household add up to $100,000 a year. After subtracting the $24,800 standard deduction and $39,000 in tax deferral, they’ll owe federal income tax on $36,200 or 36.2% of that $100,000 income.

The tax calculation on $36,200 of taxable income gives them a federal income tax of $3,952.

The tax credit of $2,000 per child gives them a $4,000 credit.

They’ll owe $0 in federal income tax, according to TaxCaster. In fact, they’ll get $48 back from the federal government, despite earning six figures between the two of them.


“Total income,” is equal to their salary minus the tax-deferred investments.


Their share of the FICA taxes will be $6,200 for Social Security and $1,450 for Medicare. Note that you don’t get deductions on the FICA taxes, which are based on the $100,000 salary.

This couple owes $7,650 in FICA Taxes.

At 5% of $36,200, the state & local income tax will be $1,810.

Add it all up and their tax bill based on 2020 tax brackets and rates will be a total of $9,412 per year, or about 9.4% of their salary.

Note that about 2/3 of this consists of payments to Social Security, and they should get at least some of that back, eventually. Isn’t it remarkable that the federal income tax was negligible with $100,000 in household earnings?

Multiply their annual tax bill times 10 and they’ll pay under $100,000 in total taxes on a million dollars of earned income when spread out over a decade. They were able to keep over $900,000 of their earned income in that ten-year timeframe.


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Earning $1 Million in Four Years


Multiplying the income from our first example by 2.5x, this couple is earning $250,000 per year. This could be a dual-income couple each earning in the low six-figures, a primary care physician with a stay-at-home spouse, or a part-time specialist like this guy.

For consistency’s sake, we’ll assume it’s a single-income household. The only place it matters much for purposes of today’s exercise is the FICA tax calculation, although in real life, a dual-income household could presumably defer more tax with more tax-advantaged retirement plan space.

Starting with $250,000 in salary and subtracting the $24,800 standard deduction and $39,000 in tax deferral, they’ll owe income tax on $186,200 or 74.5% of that $250,000 annual income.

Federal income tax, as calculated by TaxCaster, comes out to $28,847.




FICA tax is a maxed out $8,537 for Social Security and the employee’s portion of Medicare taxes, 1.45% of $250,000, is $3,625. That adds up to $12,162 in FICA taxes.

Note that if they had earned one dollar more, they would have also been subject to an additional 0.9% Medicare tax on the additional dollars earned. They would also be subject to an additional 3.8% NIIT tax on long-term capital gains and qualified dividends.

The state and local income tax will be $9,310, a flat 5% of the $186,200 of taxable income.

Based on 2020 tax rates (due May 17, 2021 assuming no extension), this couple owes a grand total of  $50,319 on $250,000 in salary, or just over 20%. That’s an effective tax rate more than double that of the couple earning $100,000 a year.

After four years at this salary, they will have paid a total of $201,276 in taxes on a million dollars of earned income, keeping $798,724.


Earning a Million Dollars a Year


While not common in medicine, public records do show that a number of our states’ highest-paid employees are employed by our public universities. The football and basketball coaches usually top the list, but the neurosurgeons and cardiothoracic surgeons often populate a few of the top 10 positions. There’s also an ophthalmologist in Oregon earning $913,335 per year in retirement as his pension, for an outlandish example.

Yes, that’s insane to me, and no, I’ve never earned anywhere near a million dollars a year, but there are docs like this out there. I’ve featured a urologist earning seven figures and another physician earning upwards of $1.8 Million a year as a practice owner.

In this example, the couple will earn a cool one million dollars in one year. To keep the FICA taxation equivalent, we’ll assume this was one income-earner, but it’s more likely to see this kind of total income from a dual-physician couple, probably in high-paying specialties and perhaps practicing some geoarbitrage.

After accounting for the same $63,800 in deductions for the tax-deferred retirement contributions and standard deduction, they owe income tax on 93.6% of their $1,000,000 income.

The TaxCaster calculation shows $283,532 owed in federal income tax. Note that the “Additional Taxes” of $6,398 credited as paid represent the additional Medicare Tax owed on income above $250,000. Don’t ask me why there’s a $1 discrepancy. A glitch in the matrix, I suppose.




This couple was phased out of the child tax credit based on the phaseout that begins at 400,000 and is completely eliminated at $480,000 for two children. The phaseout occurs over a range of $40,000 per child.

Losing the credit effectively functions as a 5% surtax on a modified adjusted gross income over $400,000. The range in which you’ll feel the effect will be from $400,000 to ($400,000 + N x $40,000), where N is the number of children you have. For more details on the child tax credit, look here.

The Social Security tax is once again maxed out at $8,537 but there is no cap on Medicare Tax, and as mentioned above, the rate jumps from 1.45% to 2.35% on salary beyond $250,000.  This couple pays $21,250 in Medicare Tax (this includes the $6,398 in “additional Medicare Tax) for a total of $29,787 in FICA taxes.

Using the simple 5% formula on the $961,000 in taxable earnings gives them $48,050 in state income tax.

The total bill is is $361,379 or about 36% in taxes on a million dollars when earned in one calendar year. They have $638,621 left.


Earning a Million Dollars in Revenue from this Blog


This website is a for-profit blog with a charitable mission. When I designed my drawdown plan for early retirement, I didn’t factor in online income, although I realized such a thing could throw a very pleasant monkey wrench into the outlined plan.

Having met a number of online entrepreneurs who are actually earning a 7-figure income from their online endeavors, I’ve fantasized about what a million dollars in revenue might look like for Physician on FIRE.

Note: I am earning nowhere near that level of income, but I’m not completely ruling it out as a possibility one day. Never Say Never.

So let’s say, hypothetically, this site were to bring in $1,000,000 in revenue in one year. I have some expenses to cover. As a site and its email list grows, the costs of doing business go up.

I pay people to help with various aspects of the site, including a commission to my business manager who sells advertising on the site. I’ve also got shareholders.

The profit sharing and business expenses take about one-third of the revenue. We’ll estimate those combined costs as $340,000 on $1,000,000 in very hypothetical revenue. My profits are $660,000 in this scenario.

I’ve got a charitable mission to donate as much as half of the $660,000 in profits. Let’s say $330,000 is donated, mostly to our donor advised fund, but I’ll likely be required to make some cash donations to charity, too, as donations are limited to 30% of adjusted gross income when donating appreciated shares of assets (which is what I prefer to do).

We’re left with $330,000. Let’s say I make $58,000 in contributions to my individual 401(k) and for the sake of this exercise, let’s assume those are tax-deferred contributions.* Taxable income has been reduced to $272,000.


But wait… there’s more!

With the latest round of tax reform passed in 2017, we have the 20% deduction of qualified business income based on Section 199A.

In this case, my qualified business income (QBI) should be the $660,000 in remaining profits, minus the $56,000 in tax-deferred investments, or $604,000. I could potentially get a deduction of $120,800. However, the final QBI deduction is based on either 20% of (pre-QBI deduction) taxable income or 20% of QBI, whichever is lower.

Since my taxable income above was calculated to be $272,000, and 20% of $272,000 is $54,400, that’s how much I’ll be able to deduct based on Section 199A. After the deduction, I’ll be paying taxes on $217,600 of taxable income.

Plugging numbers into TaxCaster, I come up with $30,431 in federal income tax due in this scenario.




FICA taxes without an employer paying a portion would be $17,075 for Social Security and $26,782 for Medicare (they don’t care about my generosity) for a total of $43,857 in FICA tax. Half of this would be deductible on the federal income tax, and that would slightly alter this calculation but we’ll dismiss that for this thought exercise.

Finally, paying my 5% to the state on the $217,600 gives me $10,880 in state tax.

Therefore, if the site had been much, much more successful last year, I would have owed a grand total of $85,168 in total tax.

That’s 8.5% of the million-dollar dream revenue. Generosity pays!

*At some level of income, it might make better sense to make all Roth contributions to take full advantage of the Sec 199A deduction. The White Coat Investor covers this calculation in great detail.



Is it Better to Earn More?


Let’s summarize what we learned about these fictional one-income couples earning one million dollars over various periods of time.

  • When earned over 10 years, the total tax is about $94,000.
  • When earned over 4 years, the total tax is about $201,000.
  • When earned over 1 year, the total tax is about $361,000.


While higher earnings are taxed at a higher percentage, the fact remains that the more you earn per year, the more you have at the end of the year. The couple earning $1,000,000 a year would have over $6.5 Million in after-tax pay after 10 years.

In these examples, the first $60,000 or so dollars are clearly the most valuable dollars as the tax owed is completely offset by the child tax credit on two kids.

Once you’re in the 37% tax bracket and completely phased out of the child tax credit, each additional dollar earned results in about 58 cents in your pocket.

This simplified example ignores the Alternative Minimum Tax (AMT), which now affects far fewer people than it did prior to the Tax Cut and Jobs Act.

What’s perfectly clear in these examples is the progressive nature of our income tax structure and the diminishing returns of additional dollars earned in a given year.

Conversely, we also see the regressive system in place to fund Social Security. The couple earning $100,000 paid nearly as much for the Social Security portion of FICA as the million dollar earners. The Medicare Tax, on the other hand, is a progressive tax with two tiers.

For the same amount of work, I’d take a higher salary eleven times out of ten. However, when you realize that you’re maybe keeping a little more than half of any extra money earned once you’ve got the salary of a physician specialist, more work for more income becomes less appealing.


How I Have Applied These Principals to My Own Life


Personally, I took advantage of the progressive nature of taxation in my own life when I worked part-time over the final two years of my career. I calculated that the shifts I gave up were the shifts that paid 30% less after tax than the shifts I was keeping.

We also considered the role of our marginal tax rate when deciding whether or not my wife would work as a dietitian after our children were born. Knowing that a $40,000 salary would only add maybe $20,000 to $25,000 to our bottom line and factoring in the cost of childcare, the correct decision for our family was obvious.

Dual physician households will face similar calculations. When the work is stressful and long, and your kids spend twice as much time with their nanny than you, keeping half of a $200,000 salary may not seem so appealing, either. You can always run the numbers based on your individual situation using TaxCaster.


Our 2019 Tax Return Released


For the financial voyeurs out there, I’ve revealed our 2019 1040 tax return line by line. I have not yet submitted my 2020 return, and I’ve filed an extension while I wait for some K-1s to come in.

We didn’t have a million dollars of income in 2019, but our total income exceeded half a million while our taxable income was less than half of that. See the full breakdown in our 2019 tax return reveal.




Has our nation’s progressive tax system played any role in your decision-making? Have you chosen to work less as a result or kept one partner home for similar reasons? Let us know in the comment box below!


27 thoughts on “Taxes on a Million Dollars of Earned Income”

  1. Interesting experiment, PoF.

    I actually have a similar thought process on working “Extra” at my main job right now. We get paid a fraction of what we make on a typical shift, and then I can anticipate losing 30% of what I actually make on those shifts anyway… so, it doesn’t make a ton of sense to work more. This will probably lead to me cutting back pretty soon.

    Your blogging example is a tough one to emulate with the 50% charitable giving goal! My site gives 25% of the profit I make to charity. Hopefully, that will have a profound impact in years to come. It was nice being able to take part in the QBI deduction this year through blogging, too.

    P.S. I always laugh at new grads when they come up to me a few months into the year, and say, “Hey, did your paycheck go up this month? Mine did and I am not sure why.” Of course, it is because they hit the social security wage base and no longer had to pay that tax. The complicated nature of our tax system never ceases to amaze me.


    • I have found myself close to that last example of W2 earning the past 3 years or so (2017 being on the cusp of 7 figures). As a single person (who did get to use Head of Household) my tax bill definitely was in the range of what you provided for both last year and this year’s taxes.

      I actually paid more in taxes than my annual salary as an attending for the first 2 years which just shocks me.

      I too realized that my least valuable dollar was my last dollar I earned so why was I killing myself only to hand over almost 1/2 to the government? That was one of the rationales I had when cutting my clinical time down to 4 days/wk. It made no sense to get burned out making every dollar I could only to pay more to the tax man.

      Pretty much all deductions worthwhile were phased out in my 2017 return (and pretty much all the years before) so I was glad to see the standard deduction go up this year.

      Your point about how W2 income is disadvantaged compared to other incomes (especially passive income) is why I am trying to build a passive income empire to give me income that has better tax implications.

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  3. As you know I went part time as well over a year ago. And it’s worked the same for me, the money I’ve given up is the money taxed at a higher bracket. I’m perfectly fine with that situation at this point 🙂

  4. This clearly illustrates the marginal tax rate….something a lot of people don’t seem to understand.

    Once you are past a certain point….the “cost”(pain) of earning the additional dollars has to be factored in. If it’s not too painful….as you say…”I’ll take more money 11 times out of ten”.

    However….if it’s too painful (night/weekend/obnoxious surgeon) then the “cost/pain” of earning that dollar (of which you only are going to keep $0.50) doesn’t make sense.

    Nicely done, POF.

    • The other thing to remember with example #3 unless someone figures out a way to spend away the rest or it just gets shoved under a mattress , a large portion is probably invested which will end up kicking off passive income much larger than example #1 annual income, which happens to be taxed better than wages…

  5. Have the 4 physicians retired yet? I think a similar post to today’s with how their different levels of spending in retirement and the tax implications would make a good addition to the series. Especially with your upcoming retirement. If this has been done already I apologize.
    Keep up the good work!

    • This is my situation. I am retired and when i turn 65 receive 1 million lump sum. Since i live in California expect to pay beaucoup taxes. Have spoken to colleagues who say there is not much we can do about those taxes. Too late to move to Washington. My accountant was not real helpful.

  6. Great post pof, when you wrote: “dual physician households will face similar calculations. When the work is stressful and long, and your kids spend twice as much time with their nanny than you”

    My heart sank and all I could think of is my wife reading that quote and crying. The plan is to go part time in 3 years for her, and likely me too if we continue our 70% SR.

    • Good for pointing out that the last dollar earned is the least valuable. I’m working part-time now because of this principle. In my former PP group there was a robust economy in trading call duties. The office would true them up as a line item on our paychecks so all deals were pre-tax. In the occasional bidding war I was willing to offer more to take my call realizing the actual cost was only about 60% after taxes.

  7. A great breakdown, thank you! I’m seeing my accountant tonight so it will be interesting to see how things have changed for us over the last year. I love the concept of how,at a certain point, those dollars earned when working more are worth less. It seems obvious but, speaking for myself, I never really thought about it before. Another excellent excuse for working part time!!

  8. Great article, POF. The tax code (and social security benefits) favors the tortoise.

    Anyway, I don’t believe the child tax credit phaseout is explained accurately. “This couple was phased out of the child tax credit based on the phaseout that begins at 400,000 and is completely eliminated at $440,000… making the federal marginal tax rate for this couple 45% in that income range even though that income is in the 35% marginal bracket.”

    What would happen if they had 15 kids? Based on the above explanation, they would lose $30k in child tax deduction between $400k and $440k AND pay a 35% marginal rate, for an effective tax rate of over 100%. I don’t generally give the benefit of the doubt to those who write tax law, but I don’t think they’d do that.

    If you look up the IRS’s “Child Tax Credit and Credit For Other Dependents Worksheet,” I think you effectively lose 5% of the child tax credit for every $1k above the threshold. Said differently, I believe the phaseout is essentially a 5% addition (never more) to your marginal rate until you have exhausted the credit (= $400k +($40k in income x number of children)). For our hypothetical fertile couple above, I believe they could still be getting a partial child tax credit even as they neared $1m in income.

    Can you clarify this?
    *I claim no tax expertise, am not in the pertinent income range, and have to revisit your and WCI’s site every year when it’s time to fill out the 8606, so I’m really unsure about this.

    • You are correct, and I appreciate you taking the time to set the record straight. I got the info on the phaseout from a reputable site, but the information was clearly incomplete. The credit would be phased out on one child from $400,000 to $440,000, but not on 15 kids.

      You lose $50 per $1,000 over $400,000 in MAGI, so the phaseout occurs over a range of $40,000 per child. With 15 kids, as you said the phaseout would occur over a $600,000 range from $400,000 to $1,000,000.

      Time to go make some more kids! Honey!!!


  9. Hi
    Can you explain how your examples contribute $37k to work based retirement? My understanding is that an employed physician will only have access to a 401k, that the ability to double the retirement to 37 (or 38k for 2019) needs access to a 457, which only those employed in the 403b world (non profit, school, government) have.

    So, if only one person is employed, and for a corporation which offers a 401k, won’t their maximum retirement contribution be 18.5k (19k 2019)?

    • Good question, Joi.

      Some will have access to more tax-deferred money (cash balance plan, HSA, SIMPLE IRA) and some will have less than the $37,000.

      Personally, I have access to a 401(k) and 457(b), which is very common among physicians.

      I had to choose one number to keep it consitent across the board.


      • Ah-I thought 457b was limited to non-profit and academic institutions.

        I understand you were trying to make apples to apples comparisons, so left other work based retirement options, such as profit sharing, and cash balance plans.

  10. Interesting post POF and good luck on the road to $1M in blog revenue (my online income is currently about $0.11 per year due to music royalties and my blog income is zero haha). The tax implications to making a bunch of money in one year are real. In fact, I know people who have cracked the seven figures income in one year and they actually change their decision making about what to undertake because of high taxes. It looks like this, if I have 80 extra hours would I rather make more income taxed at 45% or put my time into investments that are taxed at 20% long term capital gains?

  11. Physicians earning more than $1 million per year is not uncommon. This information is easily obtainable from the Form 990 that is required to be filed by non-profit organizations each year and can be found on websites like GuideStar and ProPublica (database websites for non-profit tax info). Nearly every community and university hospital are non-profit orgs. The organizations are required to report the salaries for the five highest paid, non-director/executive/trustee/key employees (for hospitals, this is nearly always the physicians). There is a urologist that works for Northwell Health in NYC that is making over $7 million as an employed physician. Cornell University’s hospital in NYC has multiple physicians making in the $3-5 million range. Just imagine what the top private practice practice physicians are making there if you can get $7 million as an employee…

  12. It’s quite amazing that a family can make $100k a year and pay ZERO federal income taxes. I love that part about taxes.

    Whoa, your income was half a million dollars+ in 2019. I can only hope to replicate those numbers some day.


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