December 5, 2024
A second job can be a great way to pay down debt for those who are able to take it on. Some worry about what a second job could mean for their taxes; we look into it here.
Navigating financial challenges can be incredibly tough, and considering a second job to make ends meet is a common response. The prospect of earning extra income can offer hope and a sense of empowerment during difficult times.
When we say second job, we don’t mean gig work. We’re talking about taking on roles with set hours, most likely part-time, to earn some extra cash. We know this kind of commitment won’t be something everyone will be able to do.
For those that are able, it's essential to understand how taking on more work can impact various aspects of your financial life, including taxes. You may worry that having more income will mean having to pay more taxes. This fear is not undue in many cases.
Having a set number of hours to work each week and an hourly wage means you have more certainty about the amount of money you can make each week, as opposed to gig work, where the income per week can fluctuate. Let’s discuss the main advantages a job like this can bring.
A second job has many benefits, the most obvious one is more income. However, it is essential to consider how you use this extra money.
Paying off debt with the income of a second job is a good strategy and one that is common among those who do take on more work. It gives debt repayments an added boost and can really make a difference in lowering your overall debt load.
Using money from a second job to pay off debt can also help you save in the long run. The more you put towards paying down a debt each month, the less you’ll have to pay in interest.
If you’re also able to put a little bit aside each week, then you can begin to build an emergency fund, something that can be used to help avoid debt situations in the future.
There are other benefits to having a second job than just the extra money. A second job will allow you to develop a wider variety of skills. These don’t have to be ‘hard skills,’ like learning a new computer program, but can be 'soft skills’ that help you in other areas.
It likely means developing better organizational and time management skills, decision-making abilities, and enhanced adaptability. Employers highly value these soft skills in the workplace, as they significantly contribute to your overall professional growth and success.
A second job can also help you in your overall career. This can be a way to significantly boost your resume and career prospects.
It demonstrates to potential employers your work ethic, time management skills, and willingness to take initiative. These attributes are highly valued in today's competitive job market and can open doors to new opportunities and career advancement down the line.
Despite the benefits of taking on a second job, there are some that are held back because they worry how it will affect their taxes. There are a few different ways this happens.
One way this happens is a misunderstanding around claiming the “basic personal amount,” which is the minimum amount you can earn before you start paying income taxes.
Right now, that amount is set at $15,000. You can only claim this amount from ONE employer.
When you start a new job, you’re given a form called the TD1 Personal Tax Credits Return. This form comes in both federal and provincial versions. Filling out these forms correctly when starting a new job is vital.
On this form, you need to indicate if you have any other additional employers and that you have already claimed the $15,000 basic personal amount with a different employer.
If you don’t, then you’ll be in for a large tax bill you may be unable to pay.
Not disclosing to a new employer that you have already claimed the basic personal amount with another job will result in your second employer not deducting the correct amount of tax from your pay.
When your T4 forms are filed, the CRA will see that you’ve claimed the $15,000 basic personal amount with two employers and come after you for the money you should have been deducted from each paycheque.
Filling out tax forms correctly when starting a new job can prevent this from happening.
Quebec has slightly different rules from the rest of the country. The basic personal amount is higher, set at $18,056. The form you’ll need to fill out also has a different name, it’s known as the Source Deductions Return. Beyond that, the same general rules apply.
Earning more and not being able to claim the basic personal amount with a second employer can push you into a higher tax bracket and make you owe the CRA more money.
Canada has 5 tax brackets, these are
If you’re wondering what the ‘plus’ means, here’s an explanation.
Imagine your income is divided into chunks. For the first $55,867 you earn, you pay 15% in taxes. If you then earn more, between $55,868 and $111,733, you pay 20.5% in taxes on that section of your income.
This pattern continues for each new income range, with higher rates as your income grows.
Earning more could potentially push you into a scenario where you’ll need to pay more tax on a section of your income.
How much more you’ll need to pay will depend on your own situation and how much your total income from two jobs is.
If you earn a low income from two jobs, though this may not be a factor, if your two jobs combined make you a higher earner, then you’ll need to prepare to pay more in tax.
Again, Quebec operates differently to the rest of Canada. This is because residents of Quebec need to file two separate tax returns: one for the federal government (through the CRA) and one for the provincial government (through Revenu Quebec).
The tax brackets for Revenu Quebec break down as follows:
While you may have to pay more in taxes, a second job is usually worth the extra income.
If you know you’ll be moving into a new tax bracket with your second job, or are worried you might be, here are some things to do.
See which tax bracket you currently fit into and how close you are to moving up a tax bracket if you were to add a second job. If you’re at the lower end of one bracket then adding a job you do part-time may not even change which bracket you’re in. If you’re closer to the higher end of a bracket though there are some steps you can take.
If you’re afraid you may need to pay more tax, it’s a good idea to set aside some money each time you get paid to handle it. A good idea is to take about 20% of your income and set it aside for tax season. Then, if you’re asked to pay, you’ll have a sizable amount to draw on that you were saving for this particular reason.
Contributing to a registered retirement savings plan (RRSP) lowers the amount of income you’ll be taxed on. Lowering the amount of income you can be taxed on can help you stay in a lower tax bracket, saving you money. An RRSP will also help you save for the future and reach longer-term financial goals.
Taking on a second job may result in being taxed more, but the extra income you earn typically outweighs the additional taxes.
Remember, you're always earning more than what gets taxed, which means more money in your pocket overall. This extra income can be crucial in improving your financial situation, tackling debts, and achieving your financial goals in the long run.
We understand that not everyone can take on a second job to handle debt issues. If you’re worried about your finances and can’t commit to another job to add to your income, then there is hope.
A Licensed Insolvency Trustee can review your situation and help you come up with a plan to become debt-free. They can work to lower your payments to what you can afford and reduce the amount you owe. The first consultation with one of BDO’s Licensed Insolvency Trustees is completely free and 100% confidential.
December 5, 2024
A second job can be a great way to pay down debt for those who are able to take it on. Some worry about what a second job could mean for their taxes; we look into it here.
