Financially better to work minimum wage or stay home?

Factual Questions
1

Okay, so the missus and I were out having dinner with some of our friends the other night. After exchanging war stories about trying to make ends meet, the following exchange occurred:

Mr. P: “My wife and I both work, but it’s always tough to make ends meet.”
Mr. Q: “How much does your wife make?”
Mr. P: “Oh, slightly above minimum wage, just $8/hour.”
Mr. Q: “Pfffft! It’s not worth it; you’d be better off if she stayed home and you claimed her as a dependent on your taxes.”

Now, I’m no tax-loophole-dodging guru, but this seems weird to me. Just off the top of my head, working $8/hour rakes in around $16,000 a year; in contrast, writing off your spouse as a dependent can’t be worth more than several hundred to $1K as a tax credit.

Am I right, and it makes more sense to do the dual-income thing? Or does Mr. Q actually have a point that I’m missing?

2

Without the $16K they could fall into a lower tax bracket and therefore pay a lower rate overall. Depends where they fall in terms of how this would play out.

(Apart from that, there are the expenses of working that you would save: transportation, clothes, etc., and if there is daycare involved forgetaboutit.)

3

It’s the supplemental tax rate that burns you. We file jointly, only I work outside the home. Based on this, our weekly tax bite from my earnings is 29%. But for any extra income I get, like a bonus, or cashing out a few piled up PTO days, it’s nearly 50%.

If this would apply to having an additional wage earner in the family, then that $8 minimum wage would work out to, effectively, $4.

4

My parents had this same argument when I started college – only my mother was a nurse and made a good deal more than minimum. My father argued her wages would push them into a higher tax bracket, pretty much negating any income she brought in. My mother, not normally good with figures, worked out a series of business-related expenses my father had not thought of as deductible, and figured out we’d stay in the lower bracket.

After that, my father started having the taxes done by a CPA.

5

Also you have to factor in stuff like food, work cloths, gas and car expenses. There were several threads that find that it is better for one to stay home if your goal is to max $ (assuming one has a entry level salary)

But there is more to it then just the $, there is social interaction and, some people who are not busy making money might be busy spending money.

6

The higher tax bracket only applied to income above the cutoff point - that is, if the tax rate is 20% on income below $50K and 30% above, and your income is $60K, then your taxes would be (.2*$50K + .3*10K) = $13K, not the $18K it would be if it were 30% on the entire income. Given that, you’re never going to fall further behind by having a spouse work.

7

Let me fight one of my favorite bits of ignorance. The higher tax bracket is a marginal tax bracket. That is, if the first income is $25,000 a year and it is taxed at x%, when you add an additional $20,000 a year (assuming the tax bracket increases to y% at $35,000) the original $25,000 + the first $10,000 of the 2nd income are only taxed at x%. The final $10,000 of the 2nd income is the only part that is taxed at the higher y% rate.

That may not be the clearest explanation in the world, but please read it over until it makes sense. :slight_smile: The point is that you can never push the original income into a higher bracket, it is only the income above that bracket that is taxed at the higher rate.

Now, I do agree that working at just above minimum wage for a 2nd income, especially if there is daycare involved, may not add much to the cash flow. One of the main impacts is the availability of the 2nd earner to run the household economically. Homemade food, not prepacked convenience food. Actually mending clothes. That type of thing.

But as a counter-argument, the 2nd earner should take into account Social Security credits they are not building up, other retirement plans they may not be funding, and the ability to re-enter the workforce at some point.

8

It’s really going to depend on the exact situation. For some minimum wage jobs, there may not be any extra cost.When I worked min wage jobs in college, many of my coworkers were second income women. They worked when their kids were in school, or their husbands were home, or there kids were old enough to be alone for a couple of hours. They lived close to the job, so transportation was minimal and there were no extra clothing expenses.(uniforms were provided).That’s a very different situation than woking 40 hours @$8.00 an hour and paying $150 a week for daycare. But one thing doesn’t make sense-

There’s a tax exemption for both husband and wife whether one works or they both work, so that’s a wash.

9

Tax rate schedule for Married Filing Jointly – 2004



Taxable income 	      But not over 	The tax is 	Plus 	  Of the amount over
is over
$0                    $14,600               $0.00         10%     $0
14,600                59,400                1,460.00      15%     14,600
59,400                119,950               8,180.00      25%     59,400
119,950               182,800              23,317.50      28%    119,950
182,800               326,450              40,915.50      33%    182,800
326,450                                    88,320.00      35%    326,450

The standard deduction for married filing jointly was $9700 in 2004; the personal exemption was $3100. Two people earning $16,000 each will have a total federal income tax of $1610. Social Security will take an additional $960, and there’s also Medicare, state tax (maybe), and whatnot. Still, I can’t see a total tax hit over $4000, leaving $28,000 in take-home pay.

If a married man files singly as a head of household, he gets a standard deduction of $7150, a personal exemption of $3100 and a dependent exemption of $3100; the tax table is different, and he ends up paying $265 in federal income tax, about $480 in Social Security taxes, and assorted whatnot leading to – oh, let’s call it $1000 in taxes, leaving take-home pay of $15,000.

As you can see, it takes a much higher tax bracket for the extra income to decline to as much as half, and over $30 a DAY in expenses to eat up the rest. Well, daycare might do that, but bridge tolls won’t.

10

The question is more about the intangible benifits you get from not working as Harriet said. If your wife can afford to stay home and garden or make home cooked meals or make clothes etc, it could contribute significantly to your standard of living even if your income was lower.

11

The big thing is when one half of a marriage works a crappy job to keep the kids in daycare, and sometimes even make less than the daycare costs for multiple children. Of course, it may be a quality of life issue the other way; some people would go crazy if they had to stay home with the kids. Without a big expense like daycare I don’t think your benefits would average out.