When you take on a second job, your primary goal is usually to pay off debts or achieve another financial goal. However, the extra income from a second job or side work can put you in a higher tax bracket, reduce your eligibility for tax credits, and may result in a significant tax bill in the upcoming tax season.
Traditional Second Job
If you work a salaried or hourly job in a traditional second job, you will receive a W-2 form at tax time, and you will have to fill out a W-4 form with your withholding information.
The easiest option may be to claim zero on your second job if you already have another job from which taxes are being withheld. It may be wise to check the IRS withholding calculator to see if you need to make adjustments to accommodate this increase in income. The IRS will want to take the money once when you file your tax return if it turns out you owe more than was withheld.
Make sure to consider federal and state taxes when determining how a second job will affect you.
Freelance Work
It will be more complicated if you are working as a freelancer or independent contractor. You will be responsible for paying estimated taxes in this case. Taxes will not be withheld from your payment and sent to the government on your behalf.
Estimated taxes are due quarterly. You can determine how much to send to the IRS to cover taxes on this new income by speaking to an accountant or using a tax calculator. You can also figure out the amount you should send by completing Form 1040-ES for the IRS.
Remember that you must pay self-employment taxes in addition to income tax if you are working as a freelancer. These are the Social Security and Medicare taxes that are normally split 50-50 with an employer. You will have to pay 100% if you are self-employed, as you are the employer, but you should include these taxes in your quarterly payments.
How a Second Job Affects Your Tax Bracket
The U.S. tax system is progressive. Tax rates increase as income rises. Getting a second job may increase your income enough to move you into a higher tax bracket.
For example, you might be single and expect to earn $40,000 from your first job. This places you in the 12% tax bracket for 2022. Let’s say you take a second job that will pay you an additional $10,000 per year, bringing your total annual income to $50,000. The excess portion of your income over $41,775 in 2022 will be taxed at 22%, because you have been pushed into a higher tax bracket.
This means you will pay an additional 10% in taxes on most of the earnings from your second job.
Make sure you are on track with your taxes in August or September so you have time to start setting aside additional money before the tax filing deadline if necessary. You can also make estimated quarterly payments even if you are having taxes withheld from your paychecks from two regular jobs.
A second job may be what you need to pay off debts or achieve another financial goal if your income is low enough in the current tax bracket that the tax rate on those additional dollars does not increase.
Other Changes in Your Tax Situation
There may be other tax changes as income rises. Taking a second job may render you ineligible for the Earned Income Credit this year, even if you could claim it last year, because your eligibility depends largely on your income.
Your taxes will depend on
Many tax credits and other deductions on your adjusted gross income, including detailed medical expense deductions, education tax credits, and child and dependent care credits. These credits diminish and become less beneficial as your income increases, until they are completely unavailable in the end.
Conclusion
Working a second job can be exhausting and stressful, but it can be a short-term solution to a specific financial need. You may find that the extra income is not worth the potential taxes based on a variety of factors. It may be better to cut back on spending and stick to a budget instead.
Frequently Asked Questions (FAQs)
Do I need to report income from a second job on my taxes?
The IRS requires you to report all earned income from any jobs, whether you are an employee or a self-employed contractor. The paying entity does not have to report what they paid you to the IRS if you earn less than $600 as a self-employed contractor, but you still must report this income on your tax return.
How can I reduce my taxes?
You can look for ways to reduce your tax bill if you are worried that income from a second job may push you into a higher tax bracket. You may want to itemize your deductions if you are paying a lot in mortgage interest, medical expenses, and charitable donations, and that adds up to more than the standard deduction you are eligible to claim based on your tax situation. You may be able to claim many self-employment-related deductions.
Source: https://www.thebalancemoney.com/how-will-a-second-job-affect-my-taxes-2386216
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