How Will a Second Job Affect My Taxes?
When you take on a second job, your primary concern is probably paying off debt or reaching a savings goal. The last thing on your mind is how that job will affect the amount that you pay in taxes over the year.
But that mistake could cost you.
You don't want to be surprised come tax day and end up owing taxes at the end of the year, which could throw off your financial goals. Before you take on a second job, consider how/if taxes will be taken out of that check, and if the second job will bump you up an income bracket.
You also need to determine if you should change your withholding with a second job. Here’s what you need to know about getting and a second job and how it will affect your taxes.
Getting a Traditional Second Job
If you are working a second job where your employer withholds taxes from your check, the easiest option is to claim zero on your second paycheck. However, it is still a good idea to check with the withholding calculator to see if you need to adjust your withholding amount. Be sure to check to see how your state taxes will be affected, as well.
Working as a Freelancer or Independent Contractor
When you are working as a freelancer or a contractor, things will be a bit more complicated because you are responsible for paying your own taxes.
This means your employer will not withhold any of the money for you. You can determine how much you should put aside to pay taxes each month by talking to an accountant or using a tax calculator. However, a good rule of thumb is 25% of what you take home, you will pay in taxes.
In addition to your income tax, you will also need to pay self-employment taxes, so you could be faced with a pretty hefty tax bill if you don’t set money aside.
You should either make quarterly payments or set this money aside.
Think About Other Changes to Your Taxes
If you increase your income, it could change your tax bracket. Other tax changes may also apply: If you receive the Earned Income Credit, a second job may make you ineligible for the benefit. This can happen if a stay-at-home spouse returns to work, as well.
While this may not affect you this year, it definitely will next tax season, so be sure to plan for that. Also, if you usually plan on receiving your tax refund as a boost, you should also plan on not getting it.
Other major changes could also affect your taxes. For example, if you purchased a home or had a child, this can change your financial picture and affect the amount that you either receive or owe in taxes.
If you started receiving dividends or you received a raise, you may also owe money next tax season. Try to keep a running tab of your tax situation as you encounter life changes, so you aren’t surprised when you get a tax bill. It’s also a good idea to make sure you are still on track with your taxes in August or September, which should give some time to start saving up additional money if needed.
Make the Most of Your Second Job
Working a second job can be tiring and stressful, and should really be a short-term solution to achieve a financial goal. So it’s important that you make the most of the money from that extra income.
Make sure you are setting aside and offsetting any costs that may increase because of your second job like eating out or increased childcare costs. If it’s going to be a long-term situation, you may want to consider a career change or going back to school so you can boost your earning power.
In the end, you may find that getting a second job isn’t worth the effort and potential taxes.
If you can manage to cover you basic expense with just one job, it may be better to tighten cut your spending and stick to a budget, instead of trying to juggle two jobs at the same time. But if this is short-term to help you raise extra money to pay off debt or to turn your situation around it can be worth the sacrifice and time.
Updated by Rachel Morgan Cautero.