Generally a need for additional money to cover bills or increase savings drives your decision to get a second job. This decision, however, should not be considered lightly as it may affect how much you pay in taxes. Whether your second job will affect your tax bracket depends on how much you make at your main job. There is no question, however, that your second job is likely to increase your tax liability.
Federal income taxes are based on tiers of income that are taxed at different rates. The tiers represent ranges of taxable income and each successive tier is taxed at a higher rate, with 10 percent being the lowest tax rate and 35 percent the highest in 2012. This is called a progressive tax system. The tax brackets operate so that the income in the lowest tier is taxed at that tier’s rate and any income above that will be taxed at the higher rate, meaning you do not pay taxes at a static rate. If your second job pushes your taxable income into the next tax bracket, you will only pay higher taxes on the amount above the limit.
Withholding is the process by which your employer collects income taxes from your paychecks on a regular basis. The amount that is withheld is based on the Form W-4 you submit to your employer. Your taxes are determined by the allowances you claim on the W-4. If your allowances are not accurate, your withholding will be wrong. Having a second job is one of the top reasons to adjust your withholding. Because you are earning more income, you will have an increased tax liability. If your second job does not withhold taxes because you are an independent contractor, you can claim fewer allowances on your Form W-4 at your primary job to account for the extra taxes you will owe.
Adjusting your withholding is a quick and easy task that potentially saves great problems come tax time. Request a new Form W-4 from your employer or download it from the IRS website and fill it out manually. The IRS provides worksheets to help you determine how many allowances to claim. Once you have filled out the Form W-4, submit it to your employer so the payroll systems can be updated to reflect your new withholding. Alternatively, you may fill out a new Form W-4 online, print it and then submit it to your employer.
Though a second job will bring in more income, thereby resulting in a higher tax liability, you can still minimize your taxable income in such a way that you may be able to avoid taxes in a higher bracket. To reduce your taxable income, contribute as much as you can up to the annual limits to your employer-sponsored retirement account as well as to any flexible spending accounts like a health care FSA or dependent care FSA. Try to maximize your income tax deductions by contributing the maximum permitted by law to your IRA. Be careful when you are filing your income taxes to account for all deductions for which you are eligible, such as the home mortgage interest deduction, student loan deductions, deductions for charitable donations and unreimbursed business expenses.