This kind of thinking drives me nuts.
I've known some very intelligent people screw this up (even one in training to be an actuary!), so I'm going to make this post here so I can refer back to it in the future.
US income taxes are marginal, not flat.
I'm going to make it simple here.
Tax rates for this example are 25% for income up to $99,999 and 33% for income above $100,000.
So if Judy is making $99,999 annually, and then is offered a 1.5% one time raise for exceptional performance on a successful project. That's a pay increase of $1,499.99, taking her to a total income of $101,498.99. Before her raise, her tax burden is 25% of $99,999, or $24,999.75.
After her raise, her total tax burden is 25% of $99,999 (or $24,999.75) and 33% of $1,499.99, or $495.00, for a grand total of $25,494.75.
So a 1.5% raise does the following:
-Raises her top income tax bracket from the 25% bracket to the 33% bracket
-Raises her tax burden by around $500 on $1,500
-Nets her roughly $1,000 more in income.
Tell me a good reason why anyone would turn down a raise of that nature, even if it bumped them into the next bracket up.
You're only taxed on the amount of money that falls within the bracket for that tax.
Otherwise, a $0.01 raise could result in a net pay cut of thousands of dollars, and no one would accept that.