How your second job is taxed differently (Hint: It's not)

As we come up to tax time, you should be getting excited for your tax return and getting your paperwork in order. With the proposed changes to the Australian Tax system it can all seem overwhelmingly difficult. I can't cover all the intricacies in one post but I can almost guarantee you that if you work two jobs, you're PAYG tax has been set up to disadvantage you.

I recently read an opinion piece complaining about the unfair taxing of second jobs. I'm not going to link it because it was overwhelmingly poorly written, contained incorrect maths, and a blatant misunderstanding of Australian tax laws. However the myth that your second (or third, or fourth) job is taxed differently to your first is so widely perpetuated that I need to address it.

This (incorrect) article claimed that any job after your first is taxed at a higher rate - 37cents in the dollar. They argued that it's impossible to get ahead working a second job if the $100 you earn in a night is immediately cut down to $63. Not only is this a ridiculous statement ($63 is still more than $0!) but it's completely false.

Okay, so how does Income Tax work?

Income Tax in Australia is sometimes seen as a big complicated issue and to be fair there are plenty of loopholes and boxes on the tax return form that can trip you up. However at the most basic level, when you are simply dealing with one income stream from an employer income tax is very simple.

To be fair it could be simpler, we could have a flat tax rate. But the above system means the if you aren't earning much, you aren't obligated to contribute as much. I like that system, because when you're not earning much the majority of your income gets poured back into our economy by way of day-to-day spending and all the little taxes on that spending (e.g. GST).

But I digress.

Our system requires you to plug in how much you earn, and spits back an amount of have to pay. You can use the able table and back of a napkin to work out your income tax, or use the ATO calculator here: https://www.ato.gov.au/Calculators-and-tools/Host/?anchor=STC&anchor=STC#STC/questions 

The important part is, whether you earn that money working for an employer, through 3 employers, or through a PAYG job, and a side hustle it all rolls up into one figure that you apply to this table.

There are different tax rates for running your own business, money earned overseas, franking credits etc. but for the sake of this article, I'm ignoring them.

Claiming the Low Income Tax Threshold

Fact: You can only claim the Low Income Tax Threshold once

Myth: You can only claim the Low Income Tax Threshold with one employer at a time

The first $18,200 you earn is tax free, this is what I am referring to when I say Low Income Tax Threshold. It is a fact that this can only happen once per tax year. If you earn $18k from two employers, you can't ask for all of it to be tax free. As above, the two amounts are rolled together and you pay tax on $36k.

The myth that perpetuates from this is an assumption that you cannot ask for the Low Income Tax Threshold to be applied when arranging your PAYG deductions. When filling in the tax forms to hand your employer you are allowed to ask for the Low Income Threshold to be applied or not to all of your jobs, or none of them. 

What is withheld during the year is an estimate of the correct amount, made by the information that the people in the payroll have. If you have one employer and earn $30,000, they know to withhold based on that amount. If you have more than one employer, each calculates your withholding based on your salary there, not the overall amount you earn. After all, your employers aren't chatting to each other about your earnings.

Case Study: John, Cindy and Stephen

Let's go back to my case study friends John and Cindy, and one extra participant, Stephen.

John earns $30,000 a year. He has only a single income source and claims no deductions at tax time. John has $2,242 deducted from his salary payments throughout the year. 

Introducing Stephen:
 our third financial case study doggo

Cindy works two jobs, earning $15,000 at each. On advice from her (well meaning) friends and family, she only claims the Low Income Tax Threshold at one of her jobs. When earning less than $18,200 in Australia, no tax needs to be paid, so her first job doesn't deduct anything from her pay. However, she isn't claiming the Low Income Tax Threshold from her second job, so they immediately begin deducting 37c in every dollar she is paid as withholding tax. Her second job deducts $5,550 throughout the year! Cindy is $3,308 worse off than John!

Stephen also works two jobs, and also earns $15,000 at each. However he claims the tax free threshold at both of his jobs. Since neither employer speaks to the other they both only know that he is earning $15,000 with them, so neither of them deduct tax from his pay. Stephen pays no tax throughout the year, getting all $30,000 straight into his pocket.

Wait, what, how?

Simply by working two jobs instead of one, and ticking a different box on their payment forms we have three different people paying three different amounts of tax? Except, that's not actually true. This is why we do an (incorrectly named) Tax Return each year. 

The point of a tax return is not (like most people think) to get a refund on the tax you've paid throughout the year. The point is to confirm that you have paid the correct amount, and balance the books with the ATO. Generally we claim some deductions (and with tax time coming up, make sure you know about these easy to claim tax deductions), which means we get a refund, but that's not always the case.

Looking at our case study, John, Cindy and Stephen have all earned the same amount of money, but have had wildly different amounts deducted from their salary throughout the year. When they lodge a tax return, they find out their correct tax bill, $2,242 each. 

Since Cindy has paid $5,550 during the year, she receives a refund. As Stephen hasn't paid anything he gets a bill for $2,242. As Johns was deducted correctly throughout the year, he owes nothing, and gets no refund.

So, what's the best approach?

At the end of the day, who has more money? It's actually Stephen. While they all earned $27,758 after tax, if Stephen puts that extra money into a high interest savings account during the year he can make roughly $50 of interest. 

Of course, the opposite could happen and Stephen could actually be worse off. If he takes that spends that extra money throughout the year, not realising he will have a tax bill, then he will find himself in a sticky situation when he lodges his return.

This sticky situation is (in my opinion) why everyone is discouraged from claiming the Low Income Tax Threshold at multiple jobs. Not because it's illegal, or because it impacts your tax bill, but because A. many people cannot manage their money, and B. the ATO would rather pay you a refund, than chase you to pay a bill.

So if you're responsible and confident with your money handling skills, I strongly encourage you to claim the Low Income Tax Threshold at all of your PAYG jobs. If not, only claim it at one job and consider it 'forced savings'. Then enjoy a big tax refund at the end of the year. Either way, enjoy that second job or side hustle, whatever you earn, you earned it.

Disclaimer time: I'm not a tax professional. This is not gospel. This is my experience, the laws may have changed. I strongly encourage you to speak directly to someone at the ATO before claiming the Low Income Threshold on two jobs. Don't ask an experienced 'friend', don't ask an accountant. Go directly to the source. This is a good starting place: https://www.ato.gov.au/individuals/working/working-as-an-employee/claiming-the-tax-free-threshold/