Does It Pay For Mom To Work?

Many of us assume having Mom work is wise, and will help a family's bottom line.

But, says The Early Show financial guru Ray Martin, that may not be so.

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.

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.

On average, the wife's income makes up 35 percent of the family's income, but that is changing. In about one-third of dual-income married couples, the wife brings home a bigger paycheck than her husband.

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 on the household finances and should be carefully considered.

"Working Tax" on a Second Income

The phrase "It costs money to make money" is certainly fitting when used to describe the second income of 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. Here are some specific examples:

  • Income taxes: Not only does a working spouse incur his or her own federal, state and FICA taxes, his or her income can also cause more of the couple's combined income to be taxed in a higher income tax bracket, and disqualify them for certain tax breaks. Due to the progressive structure of the income tax brackets, when adding a second income on top of the first, all of the second income will be subject to the highest marginal income tax bracket that applies to the married couple's total household income. On top of this, there are the additional taxes each individual earner must pay for his or her contributions toward Social Security and Medicare (also known as FICA tax), and the total income taxes can consume 30 percent of the second income, or more.
  • Child Care: Next to income taxes, this is the biggest cost to working families with young children. These costs vary by region, availability, and type of care delivery chosen. The cost of care for one child can range from $5,000 to $12,000 or more per year, which can be more than public college tuition! In addition, you may also pay for things such as gifts, supplies and activities related to the care giver.
  • Working Expenses: Work-related costs include additional clothing, dry cleaning, lunches out, and office gifts. Also, transportation to and from a job for many folks requires a second vehicle, which translates into the additional expenses of car payments, maintenance, and insurance. Often, this is unavoidable, as most families would still need another car for errands and transporting the kids to and from their activities.
  • Household Expenses: The biggest additional household cost that working families report is an increase in food and grocery expenses. When there's little time left to prepare meals, time-strapped parents pay a premium price for things such as ready-made lunch items for kids, salad-in-a-bag, or take-out food. These items can cost three-to-four times their counterparts and are the biggest contributor to an increase in grocery bills for working couples.

    Many of the expenses that make up the so-called "working tax" are fixed, which means they are the same, regardless of the amount of the income earned. So, if the second income is lower, after the "working tax" is deducted, in these cases there is very little "net income," making it unattractive to work at all.

    For instance, if the second income of the working parent was $40,000 and a person worked 2,000 hours in the year, and came away with $7,180, that would work out to a net income of about $3.60 per hour.

    Benefits of Working

    The decision to either work or have one parent stay at home has significant emotional and financial impact on the family. The biggest for some people includes the ability to maintain their financial identity, without being totally dependent on a sole-income earning spouse. Ways to address that concern include maintaining separate financial accounts and establishing credit in your own name.

    There are several valuable financial benefits to working. Among them:

  • Additional Financial Security: When the income earned by one parent is unpredictable, due to self-employment or seasonal work, for example, the steady income of the other parent can add an important source of security and predictable income to keep the family finances on track.
  • Health Insurance Coverage: One spouse may work for a company that offers medical, life and disability insurance coverage. This is particularly important when the other working parent is uninsurable or has a job that does not offer any benefits.
  • Retirement Savings: Individuals must have income from earnings to contribute to 401(k) and other employer-provided retirement plans. At retirement, it is very valuable for both spouses to have equally-sized retirement accounts, as opposed to all benefits accrued in one spouse's name. However, nonworking spouses are now entitled to contribute up to $4,000 per year to a spousal IRA or Roth IRA.
  • Social Security: At full retirement age, spouses are entitled to the greater of 50 percent of their eligible spouse's benefits or an amount calculated based on their own earnings history. Also, women who have at least ten years of earnings history may be entitled to collect a benefit from Social Security before their husband collects his benefits, which means they can begin collecting at least some of their Social Security benefits earlier than if they had not worked at all.

    Tax Breaks for Child Care Expenses

    Working parents need all the help they can get. While most parents would like to see more tax breaks for childcare costs, here is a rundown of what's currently offered:

  • Dependent Care Accounts: Many employers offer a dependant care spending account. With these accounts, families can deduct up to $417 a month, or $5,000 per year, from their pre-tax pay, which is then deposited into an account. The money in the account can then be withdrawn tax-free if it's used toward reimbursement for qualified child/dependant care expenses. The catch: What goes in must be used, or it's lost. Also, under-the-table payments to babysitters don't count as qualified expenses, because you must report the Social Security or Tax ID number of the caregiver in order to get the money out. You'll also have to report amounts paid to caregivers on Form 2441 when you file your income taxes at year-end.
  • Child and Dependent Care Tax Credits: If you paid someone to take care of your child so that you could work or look for work, you may be entitled to a tax credit of as much as $1,050 if you have one dependent child and as much as $2,100 if you have more than one child. If your employer does not offer the dependent care account, these credits can help defray some of those costs. But you can't double-dip and use both the tax credit AND the tax-free reimbursements from a dependant care account toward the same expenses. Many two-income families find that the dependent care account will be worth more in tax savings and forego the credit. If your family's income tax bracket is 25 percent or less, however, this could be a close call. See a tax adviser or read IRS Publication 503 for guidance.

    Only the costs of childcare necessary for the parent to work are eligible for these money-saving tax breaks. So, tuition for education, and the costs of overnight summer camp are not eligible. However, if you send your little one to nursery school, that cost should all be eligible. Also, if you send your 10-year-old to boarding school so you can work, then the part of the boarding school expense that is for child care would qualify for these tax breaks. Ask the school to break out the cost of child care on its bills in order to take the tax credits for the childcare portion of the cost.