Any increase or decrease to your income can change your tax bill. There’s no such thing as a second income tax bracket or a part-time job tax rate. But, depending on how much you earn from a second job, part of your income could be taxed according to a higher tax bracket. The IRS publishes tax tables that can help you determine whether the potentially bigger tax hit is worth the additional income.
A second job can change your tax bracket, but the extra income might be worth paying the additional taxes.
Federal income taxes are based on your total earnings, minus the allowances you’re entitled to. They’re based primarily on a percentage of your income. As your income increases, so does the percentage. However, if income from a second job puts you into a higher tax bracket, you only pay at the higher rate on the income that pushed you into that bracket. It is, effectively, a second income tax rate. The income that kept you in the lower bracket is still taxed at the lower rate.
If it looks like your second job is going to subject you to higher tax rates, you may want to reduce the number of allowances you’re claiming at one or both jobs. This may prevent sticker shock when it comes time to pay your tax bill.
The IRS also has a withholding calculator on their website that can help you determine how much tax should be withheld from your paychecks. It allows you to enter second job earnings in a different box than first job earnings. So it takes into account that all or part of your second job earnings may be taxed at a different rate. To change your withholding allowances fill out a new Form W-4 and submit it to your employer.
Consider Exceptions You May Lose
More income can result in fewer tax breaks. For example, if you’re currently eligible for the earned income tax credit, a higher income could make you ineligible. The earned income tax credit is a credit for low- to moderate-income earners. It reduces the amount of tax you owe based on your income and the number of dependents you have.
Like the earned income tax credit, education credits can also reduce the amount of tax you owe. This can be helpful in managing you, your spouse’s or a dependent’s higher education costs. Also, like the earned income tax credit, eligibility is based partially on your income. The amount of your income is also a factor in whether or not you can take a deduction on student loan interest you’ve paid.
Check 2018 IRS Tax Tables
You'll need to check the 2018 IRS tax tables. Most people are supposed to see their federal withholding go down and their take-home pay go up. Personal exemptions have been eliminated for 2018, but standard deductions have increased. The IRS hopes that these changes will reduce instances of taxpayers having too much or too little withheld.
If You’re Filing 2017 Late
The Tax Reform and Jobs Act that was signed into law in December 2017 won’t affect your 2017 return. It goes into effect for the 2018 tax year. If you’ve already been working two jobs and have yet to file your 2017 return, you’ll find that most tax filing apps easily accommodate information from multiple W-2s. After you enter the first one it usually asks you, “Do you have another W-2 to enter?” You just click on "yes" and then enter the information. You can also import information from your W-2s directly into many tax programs.
Second Jobs Becoming the Norm
If you decide to take a second job, you’ll find yourself in good company. A recent Bankrate survey showed that 37 percent of Americans have second jobs or sporadic side hustles. But, in addition to doing your homework on how a second job will affect your tax rate, be sure to factor in the intangibles juggling two jobs can bring. Consider the demand on your time, increased stress level and how it might affect your performance at your current job.
- Bankrate: The Average Side Hustler Earns Over $8K Annually
- Consumer Help Central: Thinking About a Second Job? Consider These 7 Risks First
- Intuit TurboTax: Does Having Multiple Jobs Affect Your Return?
- IRS.gov: 1040 Tax Tables 2018
- IRS.gov: Earned Income Tax Credit (EITC)
- IRS.gov: Tax Benefits for Education: Information Center
- IRS.gov: IRS Withholding Calculator
- Patriot Software: Updates to the Income Tax Withholding Tables and What You Need to Know
- TaxAct.blog: How Tax Brackets Work: 2017 Examples and Myth Busting
LeDona Withaar has over 20 years’ experience as a securities industry professional and finance manager. She was an auditor for the National Association of Securities Dealers, a compliance manager for UNX, Inc. and a securities compliance specialist at Capital Group. She has an MBA from Simmons College in Boston, Massachusetts and a BA from Mills College in Oakland, California. She has done volunteer work in corporate development for nonprofit organizations such as the Boston Symphony Orchestra. She currently owns and operates her own small business in addition to writing for business and financial publications such as Budgeting the Nest, PocketSense and Zacks.