How Will a Second Job Affect My Taxes?

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Your primary goal is probably to paying off debt or reach some other financial milestone when you take on a second job. The last thing on your mind might be how that job will affect how much you pay in taxes over the year. Withheld taxes can reduce your take-home pay, and that second job could bump you up a higher tax bracket.

A Traditional Second Job

An easy option might be to claim zero on your second paycheck if you're working a job where your employer withholds taxes, but it can be a good idea to check a withholding calculator to see if you need to make adjustments to accommodate this extra income. The IRS will want the money all at once if it turns out you owe more than you had withheld when you file your tax return in April.

Be sure to consider both your federal and state taxes when you're determining how your taxes 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 an 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.

You'll also have to pay self-employment taxes in addition to income tax, 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 with the more you earn. It could change your tax bracket if you get a second job and your income increases even a little.

Let's say that you're single, and you're on course to earn $40,000 in 2021 from your first job. This puts you in a 12% tax bracket. Now 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 in April 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.

Other Changes to Your Tax Situation

Other tax changes might also occur with more income. A second job might make you ineligible for the benefit this year if you received the Earned Income Credit last year, because qualifying for this credit 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 if you earn too much.

The Bottom Line

Working a second job can be tiring and stressful, and it should be a short-term solution for a particular financial need. In the end, you might find that it isn’t worth the potential taxes. It might be better to cut your spending and stick to a budget instead.

NOTE: The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.