How a second income can affect your taxes

For many Australians, taking a second job can be an essential part of staying afloat financially or a way to achieve savings goals. Director of Tax Communications at H&R Block, Mark Chapman, explains how this might affect your taxes.

With a number of us currently experiencing a combination of insecure work, variable working hours or low rates of pay, the only way to make ends meet for some households is to work multiple jobs. So, if you have more than one job, how does this impact your tax?

What tax should I pay?

You pay tax each year based on your total income. Generally speaking, the higher your total income, the higher the tax rate that you pay. At the time of writing, the tax-free threshold means that the first $18,200 that you earn is tax free. Beyond that, you’ll be taxed 19 cents for each $1 over $18,200, and if you earn $45,001-$120,000 you’ll be taxed $5,092 plus 32.5 cents for each $1 over $45,000, with higher rates applying as you earn more. These rates don’t include other potential charges such as the Medicare levy (normally 2% of your taxable income) or HECS-HELP repayments that some people may need to pay at tax time.

If you only have one job, usually your employer will simply deduct approximately the right amount of tax, based on your income. However, if you have two or more jobs, it can become difficult for employers to know where you sit on the income scale (because they may not know about your other jobs), making it more likely they will either deduct too little tax or too much tax.

When you complete your tax return at the end of the year, you’ll need to include details of income from all your jobs, as well as from other sources such as interest on your savings accounts. Your tax is then worked out based on your total income. If your employers have under-deducted tax, this could leave you with an unexpected and unwelcome tax bill.


How can I make sure my employer deducts the right amount of tax?

The first thing to get right is your Tax file number declaration form, a document that you fill in when you start work with a new employer. This form tells the Australian Taxation Office (ATO) you have started with that employer, and tells the employer how much tax to deduct. In particular, the form asks you if you want this employer to apply the tax-free threshold against the wages it pays you. You should only tick this box in relation to one of your employers – typically your primary employer, or the one that pays you the most. If you tick it for a second job as well, the tax-free threshold will be applied against both jobs, meaning you could have less tax deducted than you should and potentially face a big tax bill come tax time.

If you use a tax agent, they will be able to work out for you roughly how much tax your second employer should be deducting. If the employer is actually deducting less than necessary, you can then ask that employer to deduct a greater amount of tax each pay period to cover the shortfall. Contact your payroll department to arrange this change.

A word of caution: whilst it might seem tempting to let your employer carry on under-deducting tax – you’ll have more money to spend each week, fortnight or month – in reality it’s a false economy that will have to be paid for when you lodge your tax return, by which point you may have spent the money.

Any additional deductions?

You may be able to claim expenses that you incur for each of your jobs, provided the expenses were directly related to your job, that you weren’t reimbursed by your employer and that you can prove that you spent the money (for instance, you have a receipt or an invoice).

Each of your jobs will probably have different potential deductions, depending on the expenses you incur in each one. Crucially, if you travel directly from one job to the other without going home first – for example, you finish your day job at 5PM and then travel straight to your evening job that starts at 6PM – you may also be able to claim a deduction for the costs of travel from one job to the other, whether by public transport or by using your own car (by keeping a logbook).

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Source: FXQuadro/Shutterstock.com

What about the gig economy?

Over the last few years, many Australians have changed the way they work, moving into the sharing (or “gig”) economy either to boost the income they make from their “day job” or to enjoy the freedom of being their own boss.

The problem is that far too many people who’ve made the transition haven’t given any thought to the potential tax implications. With tens of thousands of Australians now offering products or services through organisations like Uber, Airbnb, Airtasker and many others, as well as starting side-hustles of their own, it’s never been more important to understand how the tax laws apply to these new ways of working.

Particularly if you’re coming out of a paid job, you’re probably used to having your taxes deducted straight from your pay packet by your employer. But if you start your own business – which is what working in the gig economy effectively means – nobody is going to deduct tax on your behalf, so you need to proactively manage your cash flow to set money aside for future tax bills. This might seem obvious but, unfortunately, failing to set money aside to pay tax is one of the most common pitfalls I see new businesses fall into.

So, being self-employed generally comes with extra tax obligations. You’ll need to look after your own taxes (and also potentially your own superannuation). It’s a good idea to open a bank account specifically to cover future tax payments, pay an amount into it each month that will be sufficient to cover your potential tax liability based on your average monthly turnover and – crucially – avoid touching that money until the time comes to pay the ATO.

Cover image source: Viktoriia Hnatiuk/Shutterstock.com

This article was reviewed by our Sub Editor Tom Letts and Senior Finance Journalist Shay Waraker before it was published as part of our fact-checking process. It was later reviewed and updated by our Sub Editor Jacqueline Belesky to account for changes to Australia’s income tax brackets.


Mark Chapman is Director of Tax Communications at H&R Block and is a regular commentator on tax matters for a variety of Australian broadcast and print media outlets, including; Money Magazine, My Business magazine, The Australian Financial Review, The Daily Telegraph, The Age and The Business Spectator. Mark is an author, Chartered Accountant, CPA and Chartered Tax Adviser and holds a Masters of Tax Law from the University of New South Wales. Follow him on LinkedIn.

 

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