Personal Finance Topic #104 – Does it pay for the spouse to work? – Let’s do the math

Filed in Gather Money Essential by on November 25, 2009 0 Comments

If your spouse has a job with a lower wage than yours, comment on how your HOURLY wage works out after you do your math as provided in the example below.

Please indicate the before and after net disposable expense numbers.  If you are not comfortable exposing before and after numbers, then provide the change in hourly wage for the second spouse.

(Repeat of my post in January 2009)

Summary: Pursuing a $45,000 a year job for the second wage earner nets only about $18,000 more in actual disposable income (41% of the gross income).

Introduction

Dual-earner and married couples, in which the husband and wife both hold paying jobs, make up about 57 percent of all married couples, according to the U.S. Department of Labor (the percentage may have grown during this recession).  Many families, especially those with children, feel both parents need to work to live in better neighborhoods and have access to better schools. Some also say they work to enjoy having a professional career outside the home; and some say they both work just to make ends meet. No matter what, while the decision for one member of the household to stay at home or work is a personal one, it also includes a number of important financial considerations that impact household finances and income tax which should be carefully considered.

It costs money to make money for a working parent who has dependent children. The “working tax” on a second income includes additional income taxes, childcare costs, work-related expenses, and additional household expenses.

Examples

Examples below first shows one income family with a stay-at-home Mom with a child, and the second family is basically the first family with the non-working spouse deciding to get a $45,000 job, and puts their child in a daycare, and finances a car.

All amounts are annualized.

Example Family # 1 is a couple with a single income ($70,000 a year) and a young child.

They live in a modest home and uses standard deduction on their income tax form. They own one car, and the working spouse uses public transportation ($1,000 a year). Here are some financial stats:

  • Total Wage $70,000
  • Income taxes $4,788
  • Social Security and Medicare $5,040
  • Health Insurance $3,600
  • Retirement Savings – 401(k) @5% $3,500
  • Child Care $0
  • Working Expenses: $1,000
  • Additional clothing, dry cleaning, lunches out, and office gifts. N/A
  • Transportation (a second vehicle)
  • Car payments, maintenance, and insurance N/A
  • Additional household Expenses (Mom prepares meals for all): N/A
  • food and grocery expenses $7,200
  • Ready-made lunch items for kids $0
  • Take-out food $0
  • Net disposable after expenses $44,872

“Working Tax” on a Second Income

Example Family # 2 is a couple with dual incomes ($70,000 and $45,000 a year) and a young child. They live in a modest home and uses standard deduction on their income tax form. They own one car but purchased a second car for commute. Here are some financial stats:

  • Total Wage $115,000
  • Income taxes $11,513
  • Social Security and Medicare $8,280
  • Health Insurance $3,600
  • Retirement Savings – 401(k) @5% $3,500
  • Child Care $5,000
  • Working Expenses: $2,000
  • Additional clothing, dry cleaning, lunches out, and office gifts. $2,000
  • Transportation (a second vehicle)
  • car payments, maintenance, and insurance $6,000, $600, $500 $7,100
  • Household Expenses:
  • Food and grocery expenses $7,200
  • ready-made lunch items for kids $1,000
  • take-out food $500
  • Net disposable after expenses $63,307

Summary: Changes due to adding the second income results in:

  • Gross income $45,000
  • Income tax $6,725
  • SS & Medicare $3,240
  • Working expense $15,100
  • Household exp $1,600

Net disposable after expenses +$18,435 (41% of $45,000)

This equates to about $8.86 / hr ($21.63 / hr if based on gross) for the spouse

So in this example, pursuing a $45,000 a year job actually netted only about $18,400 more in actual disposable income (41% of $45,000). Be realistic and do your own math.

I am NOT suggesting that a spouse quit her job and take care of the child, unless he/she really has a calling to work outside the home and to allow someone else to take care of the child(ren).  But a couple must think long and hard before taking on a second job for economic reasons.  Most couples can expect to lose about a third of the second income to income tax and payroll tax at a minimum.  Additional costs like transportation, new clothing, dining out, and child care costs can eat into that income in a significant way.

Also remember that higher income can push your adjusted gross income into a higher tax bracket, thus disabling several valuable income tax credits such as Child Tax credit, Hope & Life Time Learning Educational Credits, among others, which can amount to thousands of dollars per child.  Please DO YOUR OWN MATH, as these are just two examples for a specific family.  Your gross income may be higher or lower.

I recommend a book “The Two Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke” by Harvard Law School Professor Elizabeth Warren

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