How to budget with a side income or a second job

A side income works best when it never enters the monthly budget. Keep the main paycheck as the only income the budget plans on, and give every side payment one job decided in advance, an extra debt payment, a fund, or a goal. The household's rent, groceries, and subscriptions are then covered by the money that arrives reliably, and the side income, which arrives in different amounts on different dates, does its one job whether it brings $200 or $900 in a month. If the income is untaxed, a share of every payment goes to a tax set-aside before anything else.

Why side income shouldn't be in the monthly budget

Side income varies. A second job has shifts that come and go; freelance work pays when the client pays; a weekend business has good months and empty ones. A budget that counts on $600 of it plans a month that the side income does not always deliver, and the shortfall lands on the categories that were sized for the larger figure.

The second reason is that side income spent as income disappears. Six hundred dollars added to the month's spending money raises the month's spending by about six hundred dollars, and at the end of the year the extra work has produced no extra savings, no smaller debt, and a vague memory of being less tight. Six hundred dollars sent to one place, every month, produces a number that can be pointed to.

Give it one job

1. Decide the job before the first payment arrives. The usual order is the emergency fund until it holds one month of essentials, then the debt with the highest interest rate, then a goal; see How to build an emergency fund inside a monthly budget for the first of those.
2. Route the payments to a separate account, or move them there the day they land, so the side income never sits in the checking account reading as spendable.
3. If the income is untaxed, set aside the tax share first, from every payment, before the job gets its money.
4. Send the rest to the job, monthly, in whatever amount the month produced.
5. Change the job only when it is finished, the fund full or the debt gone, not because a month was large.

A worked example, a $600 month

The side income is freelance work, paid by clients with nothing withheld, so a tax share comes out first. The household has chosen a 30% set-aside, which covers federal and state income tax and the self-employment tax for most people at ordinary rates.

The main budget did not change. Rent, groceries, and the rest were paid from the paycheck as they would have been without the side work, and the $600 did three things that the paycheck alone would not have done this month. In a $250 month, the same split sends $75 to taxes and $175 to the card; in a $900 month, $270 and $630. The jobs stay, the amounts follow the month.

Taxes on side income

A second job with an employer withholds taxes from each paycheck like the main job, though the withholding is often too low because each employer calculates as if its job were the only one; check the total withholding against last year's tax and adjust the withholding form with one employer if it comes up short.

Untaxed income, freelance, contract, or a small business, has nothing withheld. The tax is owed anyway, on the income minus the expenses, and for most people it is paid through quarterly estimated payments. A set-aside of 25% to 30% of every payment, kept in its own account, is the usual practice, adjusted after the first year's return shows the real rate. Money in the tax account is not the household's, and it is never the job's.

Keep the records the side income needs

Untaxed income also brings expenses that reduce the tax: supplies, software, mileage, a share of the phone. Keep the side income and its expenses on their own account or card, so that the year's income and expenses can be read from one statement rather than picked out of the household's. A separate account also keeps the side income out of the household budget by construction, which was the point.

If the side income is small and irregular, a tag on each transaction in the household's accounts does the same job for reporting; see Tags versus categories for how a tag lays across categories.

Common mistakes

• Adding the side income to the budget's income line. The month plans on money that varies, and the short months land on the categories.
• Spending it as it arrives. The extra work produces nothing that can be pointed to at year end.
• Skipping the tax set-aside. The tax is owed in April on money that was spent in July.
• Changing the job every month. A fund that gets $170 one month and nothing the next, because the card looked more urgent, never reaches its target; finish one job, then start the next.
• Mixing the side income's expenses into the household's. The deductions are lost at tax time, and the household's spending totals are inflated by costs that were never the household's.
• Counting the gross as the job's money. For untaxed income, the job gets what is left after the tax share.

Common questions

Should I add my side income to my budget? Not to the income line the budget plans on. Keep the main paycheck as the budget's only income, and give the side income one job outside the month's categories. If the side income becomes steady, a fixed floor of it can be added to the budget's income line after a year of history, with the rest still routed to a job.

How much should I set aside for taxes on freelance income? A common starting point is 25% to 30% of each payment, kept in a separate account and paid through quarterly estimated payments. The right share depends on your total income, your state, and your expenses; the first full year's return shows the real rate, and the set-aside is adjusted from there.

What if the side income is all I have some months? Then it is not side income, and the budget for irregular income applies: budget the money that has arrived, set a floor month, and hold the surplus from good months in a buffer; see How to budget on irregular or variable income.

Should the side income go to debt or to savings first? A small emergency fund first, one month of essentials, then the debt with the highest interest rate until it is gone, then the fund to its full size. The order exists so that the next surprise does not become new debt while the old debt is being paid.

Is a second W-2 job different from freelance income for budgeting? Only in the tax step. The second job's paycheck has taxes withheld, so the whole net amount goes to the job; freelance income needs the set-aside first. The rule of keeping it out of the monthly budget is the same for both.

How Zypper handles this

Zypper keeps the side income visible without letting it into the plan. An income category can be marked Variable, for income with an unpredictable amount or frequency, and its row then shows what has been earned with no pill or pace bar, so Left to budget, your expected income minus everything budgeted for spending, stays built on the paycheck alone. A side income kept in its own account can be excluded from the budget with the Include in the budget setting, so its balance still counts toward net worth while its transactions never reach the budget's figures, and the transfer that sends each month's amount to the debt or the fund is recognized as a movement between your own accounts. A tag on each side-income expense lets the transactions page show everything with that label and its total. See Creating your budget, Excluding transactions from your budget, and Organizing transactions with tags for the details, or get started with Zypper to give your side income its job.