Here in the U.S., the tax code punishes the second income in a household in ways that few people understand. If you are earning just $15,000 per year working part time, you may be surprised to learn that you not only can afford to quit — you may not be able to afford to keep working!
If you love your job and love working, the question of whether or not to work isn’t purely financial. If, however, you hate working and only do it to help make ends meet each month, read this article carefully.
How Taxes Work for Second Incomes
If your income is potentially optional, your income is the “marginal” income in the household that determines the tax bracket at which your income is taxed.
The effective tax rate on your spouse’s income will be much lower than on yours. Your spouse sets the base and then your income is effectively added on top to be taxed at the highest rate applicable for your combined income. The particulars will vary by state and municipality, but the effective rate for your spouse could be lower than 15 percent on an $85,000 salary while your effective tax rate on $15,000 could be higher than 23 percent. Income tax alone doesn’t wipe out your income; it just reduces the contribution of each hour you work.
Are you donating a fixed percentage of your income to a church or other charity? If so, that is further reducing the value of your work to your family budget. Of course, if you are working and choosing to donate to your church or other charity keep it up! (Thank you!)
Household and Other Expenses
You should now consider the impact of your work on household expenses. If you own a car specifically to allow you to get back and forth to work, you could be spending 100% of your net pay to take care of the car. If your car is old and your commute short and infrequent, that won’t be the case. On the other hand, if you are driving a relatively new car, still making payments and have a long commute, you could be spending 100% of net pay to keep that car. An average new car costs $10,000 to $15,000 per year to own and operate, including depreciation, insurance, maintenance, fuel and interest on the loan.
There may be other expenses associated with your employment. Are you paying someone to watch your children while you work? Are you eating lunch out several times each week? Do you need nice clothes for your job that you wouldn’t need if you didn’t have the job? Are you paying a housekeeper? Anything you could cut out if you quit should be deducted from your income to determine how much you’re contributing to the household budget.
If you can work at home in your sweats and your work imposes no expenses on your household, even if you work for a modest wage, you may be contributing a great deal.
Can You Afford to Quit? Can You Afford to Work?
If when you’re done doing the math you conclude that you can’t afford to keep working, I wouldn’t be surprised. You may find that you are contributing modestly to your household budget, but that when you really add everything up, it isn’t worth the time away from your family.
Devin Thorpe, husband, father, author of Your Mark On The World and a popular guest speaker, is a Forbes Contributor. Building on a twenty-five year career in finance and entrepreneurship that included $500 million in completed transactions, he now champions social good full time, seeking to help others succeed in their efforts to make the world a better place.