Whether you want to create your own side hustle or work a part-time job on the weekends, you may be tempted to work a second job to boost your take-home pay. This may especially be the case as a new small business owner looking to stay afloat while launching your company.
If you work a second job, you’re not alone. One study found that 1 million Australians work two jobs.
While it can be a great way to give yourself a boost in spending income, you should take a look at the ‘big picture’ before jumping into a second job. Earning more income comes with significant tax implications. Perhaps the most significant tax implication is the tax-free threshold.
In this article, we’ll explain everything you need to know about the Australian tax-free threshold. That way, if you take on a new job to boost your total income, you’ll have a better understanding of the tax liability you’ll owe at the end of the year.
What is the tax-free threshold?
If you’re an Australian resident taxpayer who earns less than $18,200, you won’t need to pay income tax for the year. $18,200 is known as the tax-free threshold. It’s the figure at which you don’t owe tax to the Australian government. If you make more than $18,200, then you’re only taxed on any income over this amount.
How does the tax-free threshold impact you if you work two jobs?
If you decide to take on a second job, the tax-free threshold could impact you in more ways than one. The first has to do with the amount of tax that you’ll owe. The second has to do with the way employers withhold money from your wages.
The amount of tax that you owe
Imagine that in your first job, you earn $18,000 annually. You decided to take on a second job to help boost your income. However, if you earn more than $200 in this second job, you’ll begin racking up a tax debt.
The tax-free threshold accounts for your combined income, not just what you make from the higher-paying job. Again, for tax purposes, you’ll only owe money based on the excess of $18,200. You’ll still end up having more money in your pocket at the end of the day, but if you’re not used to having to file an income tax return, having to do so could be an adjustment and require you to find a tax agent.
If you stay under the tax-free threshold, how does that $18,200 break down? This amount of income divides out as follows:
- $350 per week
- $700 per fortnight
- $1,517 per month
Working a second job could also end up increasing the total tax you owe. The Australian Taxation Office (ATO) outlines the individual income tax rates for the next year:
- $0-$18,200: No taxes owed, as this is the tax-free threshold rate
- $18,201-$37,000: 19 cents owed for each $1 over $18,200
- $37,001-$90,000: $3,752 owed for your first $37,000 income, plus 32.5 cents for each $1 over $37,000
- $90,001-$180,000: $20,797 owed for your first $90,000 in income, plus 37 cents for each $1 over $90,000
- $180,001 and over: $54,097 owed for your first $180,000 in income, plus 45 cents for each $1 over $180,000
Note that these rates do not account for the Medicare levy, which is 2%. This 2% levy applies to all taxable income — even amounts up to $18,200 that are not subject to income taxes.
So, let’s say that your first job pays $35,000 annually. You already know that you’re going to be a payer at the end of the financial year. Knowing that you’ve already crossed the tax-free threshold, you take on a second job to help boost your earnings.
However, when you do so, you end up sending yourself into a higher tax bracket because your combined total annual income now exceeds $37,000. You’ll end up having to pay a higher tax rate on the additional income. But again, because this higher rate only applies to what you earn over the $30,000, you’ll still end up taking home more money overall.
If you’re confused about this, we recommend speaking with a trusted accountant who can better explain how the various tax brackets work in Australia. You can also use accounting software to track how much you earn throughout the year so that you can better estimate your year-end tax payable.
The other way in which the tax-free threshold can impact you is if you work as an employee for two different companies. If you work as a freelancer, you’re required to pay your own taxes on the income that you earn. The tax rates for sole traders are the same as individual taxpayers. This means the $18,200 tax-free threshold is available for both sole traders and individuals. As a sole trader, you’re required to withhold and pay your own income taxes.
But, if you’re an employee, your employer is required to withhold tax on your behalf. To start this process, your employer will provide you with a tax file number (TFN) declaration form. If you utilise the Centrelink system, you can receive this TFN declaration form through it as well.
You’ll provide information to complete this form. One of the most important questions on this form is Question 8, which asks, ‘Do you want to claim the tax-free threshold from this payer?’ You’ll want to choose ‘Yes’.
Your employer will then track how much you’ve earned. Once you exceed the tax-free threshold, the employer will then begin withholding taxes on the excess.
Where this becomes a bit more interesting is if you’re working as an employee for two different companies. Again, if you’re working as a sole trader in your second role, you’ll probably just claim the tax-free threshold through your primary employer.
But what do you do if you have two employers? And, what do you do if you receive a government allowance or taxable pension but also work in a part-time role?
In these cases, you’re going to claim tax-free threshold rates from the employer or payer that pays the highest salary. That’s because the second employer is required to withhold tax at the ‘no tax-free threshold rate’. This serves as a tax offset and helps reduce the likelihood that you’ll owe extra tax at the end of the year.
If you happen to have too much tax withheld throughout the year, you’ll receive a tax refund.
One way to avoid having too much money withheld is by tracking your funds and filing a withholding only when you cross the tax-free threshold rate. If you do so, you’ll need to file a withholding declaration with your employer.
Filing a withholding declaration instructs your original employer to withhold funds. This pay-as-you-go system creates fewer problems down the road and attempts to reduce the amount that you’ll owe at the end of the year.
If you happen to notice that employers are withholding way too much money from your paychecks, you’ll need to submit a PAYG withholding variation application. Upon doing so, the government will look at your earnings and come up with a varied withholding rate. The government will then pass this rate on to your employers who will institute the changes on your next pay stub.
Requesting a withholding review is not something that you should treat lightly, however. There are only certain circumstances in which you’re allowed to make such a request. The first is that you’re certain of your income amounts. Keeping diligent records, like payment summaries, is an excellent way to show how much you’ve earned.
Second, you’ll need to be disadvantaged by the current withholding rates. You should not apply merely to see if you can secure a better tax rate. You should have proof, or a strong inclination, that you’re losing money under the current rate system. The purpose of withholding variation is to ensure the amount you withhold during the year is as close as possible to your year-end tax liability.
Tips to consider when claiming the tax-free threshold
The Australian Taxation Office will look at your total taxable income for the financial year, which means the income from both of your jobs will be added together. To avoid getting a rude shock come tax time, it’s definitely worth setting aside money regularly to cover your tax bill if you decide to get a second job.
As discussed above, if you’re an employee for both jobs, your employers should automatically withhold funds. Just remember to not tick the tax-free threshold on both jobs — only one.
On the other hand, if you’re doing a side gig as a freelancer or sole trader as your second job, you can use the tax brackets to determine how much money you should be setting aside each week or month. Just remember that your tax will be calculated from your total taxable income, including both jobs.
While you may be able to claim significant tax deductions as a sole trader, it’s best to not consider these when you’re setting aside your tax. That way, you might actually get a pleasant surprise come June 30 when your tax is calculated.
You should account for your deductions at the end of the year as a potential refund, instead of relying on them when making your quarterly payments.
Understanding the tax-free threshold will maximise returns
If you’re looking to take on a second job, it’s tempting to grasp at the highest-paying opportunity available. However, you should take the time to look at the bigger picture and consider the potential tax ramifications associated with your decision.
Be sure to consider the Australian tax-free threshold and whether the additional funds would push you over the $18,200 limit, at which point you’d need to pay taxes. Similarly, think about how much you’re going to need to withhold from your two employers to avoid over or under withholding. A tax agent can help you sort through these dilemmas.
If you take the time to understand what the tax-free threshold is, you’ll put yourself in a much better position for success, increasing the amount of money in your pocket.