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What Really Happens to a Second Income After Taxes…

The high cost of living is driving many families to seek second and even third incomes to help make ends meet. But what if that second job isn’t really worth it?  Families that take a closer look at their true tax burden as a W-2 employee are realizing that having both spouses work outside the home is actually costing the family money.
This is illustrated in Jane Bryant Quinn’s Woman’s Day article, “How to Live On One Salary.” In the article, Quinn highlighted an American family with a husband earning $40,000 per year (in 1995 dollars).  Every month the family was short on funds so this prompted the wife, Lori*, to get an administrative $15,000 per year job. When Quinn examined the economics of earning this extra income, the results were startling!
First, Lori had to pay $4,500 in federal and state taxes on her new salary.  Since they filed jointly, the family’s combined income was what established their tax bracket. Lori had Social Security withheld from her paycheck which added a non-deductible amount of $1,148 to her tax bill.  She also commuted 10 miles round trip, resulting in non-deductible commuting costs of $696. Child care expenses gave a partial tax credit, but Quinn figured that the amount spent beyond the credit was $4,250 per year. Lori also ateTax out each day, resulting in a non-deductible expense of $1,250 a year.  Now that Lori had a job, she had to have better clothing and more dry cleaning. Quinn assumed that Lori’s increased expenses here were an extra $1,000 per year, non-deductible, of course. Finally, with both spouses working, Lori wasn’t in the mood to cook. This resulted in more eating out and increased yearly non-deductible food costs of $1,000.
Add it all up and Lori’s take-home pay was a paltry $1,156 a year, for which she had to put up with the commute, boss and corporate hassles.  Her children also suffered by spending the majority of their day without either one of their parents. Without taking a close look at her true tax burden, Lori was doing her family more harm than good.
One of the best ways to earn a second income is to break out of the W-2 mindset and consider launching a home-based business.  If Lori had done so, she could have netted her entire $15,000 per year salary, representing an increase of almost 13 times her take-home pay as a W-2 employee.  Plus many of her expenses would be tax-deductible.
Of course Lori and her husband’s income would be higher in today’s dollars but so would the cost of living and the tax burden, so you can see this is an excellent example of just how inefficient a second-income can be for the average middle-class American family. If you are a stay-at-home mom, be sure you examine all the numbers carefully, including the tax numbers (or have your accountant do it) before you run out and get a job out of the home. It truly may not be worth your time to do so. Be sure you have examined all your stay-at-home work opportunities first, which offer a much better tax deduction than W-2 employment.

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