When you take on a second job, your primary goal is likely to pay off debt or reach some other financial milestone. The last thing on your mind might be how that job will affect how much you pay in taxes over the year.
However, withheld taxes reduce your take-home pay, and that second job could also bump you up to a higher tax bracket.
Learn more about how different types of jobs, from traditional wage work to freelancing, can impact your taxes.
A Traditional Second Job
If you have a traditional second job, you are working for a regular salary or hourly wage. In this case, you'll receive a W-2 at tax time, and you'll have to fill out a W-4 with your withholding information.
If you already have another job where taxes are withheld from your paycheck, one easy option might be to claim zero on your second paycheck if you're working a job where your employer withholds taxes.
However, it can be a good idea to check a withholding calculator to see whether you need to make adjustments to accommodate this extra income. If it turns out that you owe more than you had withheld, the IRS will want the money all at once when you file your tax return.
Be sure to consider both your federal and state taxes when you determine how they will be affected by a second job.
Working as a Freelancer
Things will be a bit more complicated if you're working as a freelancer or other type of independent contractor. You're responsible for making estimated tax payments in this case. No one will be withholding taxes from your pay and forwarding the money to the government on your behalf.
Estimated tax payments are due quarterly. You can determine how much you should be sending to the IRS to cover tax on this extra income by talking to an accountant or using a tax calculator. You can also calculate how much you should remit by completing IRS Form 1040-ES.
In addition to income tax, you'll have to pay self-employment taxes, which are the Social Security and Medicare taxes you would ordinarily split 50-50 with your employer. You'll have to pay 100% if you're self-employed, but these taxes can be included with your quarterly payments.
The Effect on Your Tax Bracket
The U.S. tax system is progressive. Tax rates increase, the more you earn. It could change your tax bracket if you get a second job, and your income increases even a little.
Suppose you're single, and you're on course to earn $40,000 from your first job. This puts you in a 12% tax bracket.
Now, suppose you take on a second job that's going to pay you an additional $20,000 a year. Added together with your earnings from your first job, the portion of your income over $40,525 will be taxed at 22%, because you've been pushed into a higher tax bracket.
You'll be giving the IRS 10% more in tax on most of your second job's earnings.
Make sure you're on track with your taxes in August or September so you have time to start saving additional money before Tax Day if necessary. You can also make quarterly estimated payments even if you're having taxes withheld from your paychecks from one or two regular jobs.
If your tax bracket is still low enough that you can take home the majority of your pay without it going toward taxes, a second job may be just what you need to pay off debt or meet another financial goal.
Other Changes to Your Tax Situation
Other tax changes might also occur with more income. A second job might make you ineligible for the Earned Income Credit this year (even if you could claim it last year) because qualifying for it depends a great deal on your income.
Numerous other tax credits and deductions depend on your adjusted gross income (AGI) as well, including the itemized medical expense deduction, the education tax credits, and the child and dependent care tax credit.
These credits "phase out" and become less advantageous as you earn more, until they finally become unavailable entirely.
In 2021, the American Rescue Plan expanded eligibility for a variety of tax credits in response to the COVID-19 pandemic. This means that, even with a higher income, in 2021 and 2022 your household may still be eligible for:
- The Child Tax Credit
- The Child and Dependent Care Tax Credit
- Marketplace health insurance subsidies/tax credits
The Bottom Line
Working a second job can be tiring and stressful, but it can be a short-term solution for a particular financial need.
Depending on a variety of factors, you might find that additional income isn’t worth the potential taxes. It might be better to cut your spending and stick to a budget instead.
The information contained in this article is not tax or legal advice and is not a substitute for such advice. State and federal laws change frequently, and the information in this article may not reflect your own state’s laws or the most recent changes to the law. For current tax or legal advice, please consult with an accountant or an attorney.
Frequently Asked Questions (FAQs)
Do you have to claim a second job on your taxes?
The IRS requires you to report all income earned from any jobs, whether as an employee or an independent contractor. If you earn less than $600 from a particular job, the employer doesn't have to report what they paid you to the IRS, but you still have to report it on your tax return.
How can I reduce my taxes?
If you're concerned that the income from a second job might push you into another tax bracket, you can look for ways to reduce your tax bill. If you pay a lot in mortgage interest, medical expenses, and charitable donations, you may be able to itemize your deductions. Additionally, you may be able to take various self-employment deductions or other deductions for job-related expenses.