Here’s why you won’t really pay ‘extra’ tax on your second job

People who are pondering taking a second job are sometimes worried about the prospect of a big tax bill.

The spectre of “secondary tax” looms large – maybe thanks to memories of a time when tax was applied to second jobs at a range of different, larger rates.

It was raised as an issue by Debra Middleton, who said she was surprised by the amount of secondary tax she was charged when she took a second job to help keep on top of the increasing cost of servicing her home loan.

But the idea that you pay more tax on secondary income is a myth.

READ MORE:
* Do you know how much tax you pay?
* ‘Tax literacy’ may be partly to blame for pensioners’ surprise bills, expert says
* Pensioners claim bad tax advice to blame for bills

Here’s what you need to know.

What tax rate will you pay if you take a second job?

The good news is that you don’t pay a higher rate of tax just because a job is your second job.

Your tax bill is calculated based on your total income. Annual income up to $14,000 is taxed at 10.5%. Anything you earn that is over $14,000 a year and less than $48,000, is taxed at 17.5%. Annual income between $48,000 and $70,000 is taxed at 30%. Between $70,000 and $180,000 is taxed at 33% and anything earned over $180,000 in a year is taxed at 39%.

If you’re earning $50,000 from your main job and you take a second job paying $10,000 a year, the money you earn from that will be charged at 30% because that’s the tax bracket it falls into.

Having a second job increases what you earn overall, so you will pay more tax – but you won’t pay more tax on a second job than you would have if you were simply earning more in your main role.

How is it taken from your pay?

If you don’t elect otherwise, you’ll pay a flat tax rate of 30% on your secondary income no matter what your annual income.

But at the end of the year, if it proves that this is too high a rate, you will get a refund from Inland Revenue.

If you needed to pay more, you might get a bill.

There are other ways

You can also apply for a special tax code that reflects your income.

That means if you know what you will be paid in your main job, and that your secondary income needs to be taxed at a certain rate, you can apply for your own tax code to ensure that happens each pay, rather than waiting until the end of the year for a square-up.

“That’s often the better approach,” said tax expert Terry Baucher.

“That will look across what’s your total income across all your jobs and apply a rate accordingly.”

He said now would be a good time to apply to Inland Revenue to set one up.

“Right now would be a good time to apply, then from May to the end of June it’s pretty busy and might be difficult and you might have to default to the standard secondary tax code while that is happening.”

What if you’re self-employed?

Secondary tax rates don’t apply if you are self-employed. If you’ve taken on a side hustle and are contracting to someone, you pay be paying withholding tax on those payments but you don’t have to worry about secondary tax codes. You might need an accountant to help you work out your tax obligations at the end of the year, though.