Beware of Tax Drawbacks of Working Two Jobs
Working consecutive jobs in one year should not cause you any extra stress at tax time. However, working concurrent jobs in a calendar year can cause some grief.
When you have two employers simultaneously, chances are that they are withholding your taxes as though they were your only employer. The end result could be that your withholding falls short at tax time and you wind up owing the Internal Revenue Service some money.
Let’s draw an illustration – John and Mary are friends and they each earn the exact same amount per year. For the sake of math, let us say that they each earned $90,000 in the same calendar year. John earned his money by working two jobs, simultaneously. Mary made her money through two employers as well, but in her circumstance she switched from one employer to the other. She did not work two jobs at the same time (concurrently), but worked one right after the other (consecutively).
Mary’s tax situation is pretty cut and dried. She paid federal withholding taxes based on projected earnings of $90,000. John, however, paid federal withholding taxes based on projected earnings of $45,000 when he actually made $80,000.
The problem begins because citizens earning $90,000 are in a higher tax bracket than those who earn $45,000. About half of the income of a person earning $90,000 annually is taxed at 25% and a small part of their annual earnings are taxed at 28%.
A person making $45,000 a year has about one fifth of their income taxed at 25% and none of it taxed at 28%. This is not good news for John. Unless he amended his W-4 to show zero exemptions or withheld extra money, he’s going to owe money in when it’s tax time.
This example is very basic and based upon the idea that neither Mary nor John have minor children, they are both single, or have a husband or wife who could not be claimed on their income tax. There are many other scenarios that could be added to the equation, but we are using a simple formula in order to draw a clear conclusion.
That conclusion is – if you are working two concurrent jobs, as many Americans have recently been forced to do because of hard economic times, take a good look at what this may do to your tax situation far ahead of tax time. You don’t want to find yourself in the unfortunate situation of awaiting a refund, only to be told you actually owe a payout.