Budgeting, Making Money, Personal Finance, Taxes, Work

Two-Income Trap: Why Many Couples Shouldn’t Both Be Working For The Money

money trap

No doubt you have heard of the Two-Income Trap. I think a major issue that is often overlooked with the Two-Income Trap are taxes. I come from a situation where when it came down to having kids and wanting a spouse home, we never saw much of a loss going down to one income because the second income would have entirely gone to taxes and daycare.

Obviously, this determination depends on many factors, but being a financial professional and having people come to me for financial advice I get to see the intimate details of many families’ finances. It is amazing to me how often people are taking home gross pay significantly more than us on 2 incomes, but take home less than us at the end of the day when it comes to daycare, taxes, and the other expenses of working.

I think part of the problem is that the tax code is so complex and taxes are so little understood by the average person that most people don’t realize how little they are really working for at the end of the day with a two worker family. We have found it far less stressful, and more economical to try to bring in another few hundred a month on the side, rather than through all the energy and effort of a second full-time job.

There are two things to remember when it comes to taxes. First off, social security taxes of 6.2% are subtracted from the first $97,500 of your pay. Medicare taxes will eat 1.45% of your paycheck with no limits. What this means is that in most cases, a second wage will be hit by 7.65% in taxes right off the bat. While this is the case for most people with kids or not, much too often people look at their second wage gross pay with little regard for how much they actually get to take home.

The other consideration is the income tax brackets. During 2007-2010 people can get away with a lot more in a second income without jumping up to the next tax bracket due to the Bush tax cuts. But from a professional standpoint, these temporary provisions are due to “sunset” in 2010 and there is no indication that they will be extended.

What this means is currently the first $64k of your taxable income is taxed at a rate of 10-15%, and the next $64k you make as a married individual will be taxed at a rate of 25% per a tax calc tool. Even at these rates, you can see that a second wage in many cases will be taxed at a higher 25% Federal tax rate. When you look at pre-2000 tax rates, and where rates will most likely be in the future, it is even worse. Going by these as a reference, only the first $43,000 will be taxed at 15%, and the next $65k or so will be taxed at 28%. For the longer term, these are the tax rates we are looking at, and it puts a much larger dent in the second income of a married couple.

But let’s look at it from today’s standpoint. Throw in some state taxes (assume 3%), and if you make $60k per year and your spouse makes, let’s say $40k, and right from the start the couple only gets to keep 65% of their second pay-check, or about $26,000.

Now if you throw in a child into the equation, you also have daycare to consider. In the area where we live, daycare is insanely expensive. At the least, care for an infant would be $12k/year. Forget anything fancy or upscale. If you are only having one kid, and live in an expensive area, you can still probably justify a second job in order to keep $14,000 a year (after daycare expenses). But doesn’t it make you pause? Would a part-time job be easier? Do you need that entire $14,000? Is a full-time job really worth it?

When you throw two kids in the mix, it really gets interesting. Maybe by the time you have two kids the older kids care will be cheaper, or you will get a sibling discount. So say you pay $18k/year in daycare and then you would get to keep $8,000 a year of a $40k wage. I didn’t even get into the expenses of working, like gas and professional attire, etc. Add all the added costs of convenience, after being exhausted from the demands of 2 working adults (are you really going to cook dinner every night to keep costs down?) and you can see how a second job can start to amount to nothing for many working parents. In some cases it can be more of a drain than more income.

There are, however, exceptions to the rule. You may find extremely cheap childcare (perhaps a family to care for your children or your work provides it at no cost). You may be able to fund a 401k with most of a second income, to save income taxes. You may be able to find better benefits with a second job, which could save thousands a year. You may not mind a life of working opposite shifts to avoid daycare costs. There are many, many things to consider.

While these exceptions do exist, I know too many people who aren’t really looking at the big picture and what a drain a second income has become to their family. I know too many people who really wish they could be home for their kids, but think they need that extra $40k/year (that is really $0 – they just haven’t looked very closely at it).

For us, we knew in the early years we wanted to have one of us home with the kids. We saved a considerable amount of cash to bridge the gap. But even more importantly, we did a lot of tax strategy. I am a tax accountant, so it just seemed the obvious thing to do. With another dependency exemption, the child tax credit as well as the loss of the second income, we decided I could squeeze another $400/month out of my paycheck easily by changing my withholding allowances to reflect our new little deduction. We had to give up our usual tax refund at the end of the year, but in essence gave myself a nice raise to help cover the absence of a second income.

I know too many people around here making $100k who only get to keep $70k after taxes, and they shell out really big bucks to daycare on top of that. I always find it ironic that many seem jealous of our lifestyle. The assumption that I must make six figures to have a spouse that can stay home. The fact is we had many years in the $50k range, but some of those years I took maternity leave and got to keep over 95% of my paycheck (with the refundable child tax credit).

Today I make closer to $70k, but since we aren’t being slammed with taxes (we would be with a second wage) I get to keep on average 90%. This is a very short-term situation, but illustrates a big problem of the 2-income trap. I get to keep a larger amount of my income because I make less. There are also no (expensive) childcare considerations. On top of that I have a spouse who is home 24/7 to take care of the household, grocery shop, and cook dinner. We find it very easy to rein in costs as we have plenty of time to shop around and pursue more frugal endeavors, rather than settle for more expensive conveniences.

In addition, we lead a much more relaxed lifestyle which means less medical expenses from stress and a busier lifestyle. We enjoy a higher quality of life. We find it far easier to focus on bringing in another few hundred dollars a month on side endeavors and hobbies that the drain of a second full-time job and the added stress that it could put on my job (more sick days home to care for children – sick days and daycare vacation days – shuttling kids to daycare, etc., all which takes great time, and in the end could depress my wage).

On the flip side, and to be perfectly honest, I am not sure we realized when we decided to take a short-term hiatus from 2-incomes how hard it may be to find a second income again down the road. Since in our family it is the husband who stays home, we have found a pretty huge brick wall when it comes to a little side income. My maternity leave was unexpectedly extended after our second child and we weren’t too worried as I figured my spouse could go find some part-time or temp work to bring in a little extra money in the meantime. In his short job hunt he came across a lot of resistance as he was really too over-qualified for part-time retail or temp work. At the same time I think the discrimination that he faced since he took a break from the workforce was even worse. I do not know if it is any easier for women, but we really got the impression that this will be a big stumbling block when he is ready to return full time. In our case we were prepared enough and thought enough through that it does not worry me terribly, but I do share because going down to one income on a temporary basis can become a much longer-term drain than you ever initially considered.

For now we wonder if we will ever see the point of working two full-time jobs again. This is due to many things that have changed over the last few years, including my earnings power increasing faster than expected. But all the same, a long-term lifestyle was never a consideration when we made the 1-income leap. So it is best to look at as many angles as you can before making such a leap. One thing that I will always respect about the many friends I know who were unwilling to make the 1-income leap is that there was some sense of longer term financial security that they weren’t willing to risk. I guess this is my attempt to share both sides of the story the best I can.

I did want to share though that I recently came across the most comprehensive calculator I have ever seen about the true costs of a second wage. I found this calculator interesting because it seemed to accurately reflect tax considerations (though this reflects tax rates from a couple of years back), as well as many other often overlooked expenses of a job. It certainly discounts most of the longer term affects of quitting a job or leaving a career for any length of time. For many of us who feel it is worth the risk to be there for our kids, but feel it is just a little out of our financial reach, it is something to consider, to see that working may be costing you far more than you ever realized, or that maybe it isn’t as far out of your reach as you thought.

39 thoughts on “Two-Income Trap: Why Many Couples Shouldn’t Both Be Working For The Money

  1. One important consideration: If my wife stays home to take care of a child for an extended period of time, she could do permanent career damage to herself.

    My wife could stay home and we would save daycare expenses, but what happens in 5 years when she tries to go back on the job market (assuming she even agrees to)? Then, she not only has missed out on annual raises, she most likely will be paid even less than she was originally making (assuming that anyone hires her in the first place). All of this forgone income would mean I can kiss my dreams of early retirment goodby.

  2. My wife earns about $200,000 and I earn about $100,000. On every dollar I make nearly half of it goes towards taxes and entitlement programs.

    I don’t expect anyone to feel sorry for us (and indeed they likely don’t), but for me that creates a *severe* disincentive to work. Indeed it is likely that I’ll leave my current job in the near future, and try my hand at starting a business, such that income can be sheltered from the usurious tax rates.

  3. Anonymous – I work with many high-income clients in pricey Cali so I get it. $300k doesn’t buy near as much as most people think after taxes and the insane cost of housing. I think this is another reason we balk at a second job the more I make. IT is nice to keep 90% of my income, why would my spouse work only to keep a very small portion? But I know most people won’t agree or *get it* until they are there. It is common out here to want to earn a little less and keep more of what you make.

    Alex – I couldn’t agree more – and I alluded to that.

  4. Alex,

    You bring up your wifes missed annual raises and difficulty finding a job but do you realize how much better it is for your children to have a parent at home with them rather than tossing them into daycare? Easiest sacrafice two people should be able to make in life.

  5. I just got married and my wife doesn’t work, and there’s a significant tax break.

    Does the second income disadvantage still look the same if married filing separately?

  6. Only $8000 after taxes? Where I come from, $8000 is a lot of money. Put that $8000 into a 529 account for your baby, and watch it grow.

  7. “My wife earns about $200,000 and I earn about $100,000. […] usurious tax rates.”

    A 50% tax rate is hardly usurious when you are earning 6 times the median household income.

  8. My wife quit working when she was pregnant with our daughter (my daughter is now 20 years old). She raised two children on my income and we are no worse off than most of my friends that are two income families… They have a little more “stuff”, but my kids haven’t gotten into any trouble and it doesn’t appear that they will. Time is the most precious thing… you only get so much, then you’re gone…

  9. My husband works, I get to parent our two year old son. I don’t work! My husband doesn’t make a lot by most standards, we love our life. We don’t feel compelled to buy land rovers and mcmansions so we don’t miss the extra money anyhow. It would buy a bigger safety net but it could never replace our son and getting to participate in his life. Hate to be a jerk but the nanny doesn’t take as good care of a kid as a parent -I have seen her, she’s on her cell phone. The day care doesn’t so so hot either. You try watching the neighbors kids and yours…do they all feel loved and get attention? Are they all safe?
    And if you are a “spending too much time with the kids doesn’t appeal to me” kind of person then why have them? You would save a lot of money in the long run just banking money monthly for someone to take care of you when you get old.

  10. Somewhere a violinist is playing a 1 centimeter violin in sympathy of those couples making a combined $300K a year. The horror! I mean, how does anyone make that little money and manage to get by?

  11. You jealous types don’t get 6:33’s point: The commenter was saying that the way the tax system is set up, he has little incentive to work. He also specifically said he’s not looking for sympathy. But you saw someone who made more money than you so you just had to snark. Whatever. You should try to honestly consider whether our society is well-served by pushing people in that situation out of the job market with such high tax rates. Maybe if they only make 200K a year, it’ll be a little closer to what you make and you might be a little less envious. But then someone’s lost their accountant or family doctor, or manager, and society has lost $25,000 or whatever a more-reasonable tax rate would have collected had the guy stayed at work.

    Alas, your comments were fueled by envy and not reason or logic, so perhaps I ask too much.

  12. Why get legally married at all then if there are no tax breaks ? You could have two incomes up to $65,000 taxed at 10-15%. You’re saving $6500 to $10000 per year if you’re not married.

  13. Hello,

    I’m from Sweden and understandably a little ignorant on US tax policies. Where does the money go that you pay in taxes? What I pay in taxes goes to sponsor the healthcare system, roads, social security, etc, etc. While I might not agree with the how and what of some specific points of national spending, in general I think it’s a good idea for some of my cash to go to the common good. I understand the points made in the post about an impractically skewed taxation system, what makes me comment is that some of the comments could (I say could) be interpreted as defining taxes as being something inherently bad and preferably avoidable. Is this the general feeling? What do you think?

    Btw, we’ve got roughly 30% base income tax here. With VAT on food & goods and other taxes, roughly 50% of my salary goes to the state. When you make over approx $42000 that number increases incrementally up to a certain amount 🙂


  14. I find this notion that mothers who work are bad mothers to be a little too 1950ish for me. Studies have shown that putting a kid in a good daycare situation yields the same results as stay at home parenting. I think most people probably over-estimate their own parenting abilities.

    I agree that if you are just talking about a couple of extra thousand dollars for the parent to work, it may not be worth it. But where the money is significant (Our after tax net income, including good daycare, would shrink $30K)a decision for one parent to stay home could end up being a permanent decision that brings with it the end of many life goals and dreams.

  15. Mat – The vast majority of Americans understand that taxes are necessary for roads, schools, police, and yes even health care for the poor and elderly. A lot of people also feel like they pay too much in tax and are happy to reduce their burden in a lot of ways. My guess is even the more tax-happy commenters claim every tax break for which they qualify.

  16. $8k is certainly a lot of money – but not necessarily working a full-time job and never seeing your kids for!

  17. Alex-

    I think you read too much into this. I am a working mom myself and though my husband stays home to care for the kids – we put our son in daycare 2 days week for the socialization. I am not sure I could find better care outside of my extended family (actually maybe this is better than family). But overall just throw that out because I am not an all or nothing person. I know too many moms who think it is so HORRIBLE that we would put our kids in care at all, or that I work, etc. All I see is I have a very well rounded child who knows life beyond mom and dad, and I feel he is blessed to have that. I know plenty of working moms who don’t work full-time or find much balance, or many in our situation where the father cares for the child. But I guess mostly I have to clarify because I did not insuate in any way shape or form that daycare is bad or that moms shouldn’t work. Wouldn’t that be a little hypocritical? 😉

  18. John – Married Filing Separately will in most cases give you little advantage. Most of the time you would pay more tax. If you live in a community property state it gets ugly because you have to split all your income on the returns anyway – which just means you are either going to file your return wrong or pay a CPA a lot to figure it out. 😉 If you are not in a community property state -most situations MFS makes little difference. Sorry to say.

  19. Hmmm, not getting married could be a strategy, but I would be wary. The benefit of being married is property passes between you tax-free in case of death, etc. In most cases I imagine it is best to pay the marriage penalty, in the long run, for peace of mind and other legality issues. There may certainly be some cases where this is not the case, but I think mostly it opens up a whole bigger can of worms!

  20. We are living on one income while my husband literally builds our small, energy efficient retirement home with cash from our savings. He’s had to deal with a few folks thinking he wasn’t actually “working”. Makes one wonder what “work” is supposed to look like. One friend came around after a general contractor ripped her off for many thousands of dollars and left the job unfinished. I guess if couples evaluated their skills, put a dollar value on those skills then applied them toward what they want out of life, it would be clear where they should invest their time and energy. For the upper middleclass, maybe dual full time jobs are not the answer.

  21. This comment is to Alex who has stated that good daycare is as good or better than home parenting. You have drunk the Kool Aid, my friend. Do you really expect a complete stranger, working for a corporate day care chain, making slightly more than minimum wage, with perhaps no more education than a high school diploma, to provide care comparable to the mother’s and father’s? Oh, I forgot, you said “good” day care. What is “good” day care? What most parents do is go with the day care center that is the closest to where they live and what they can afford. I have two terms for such arrangements: “day orphanages,” and “kid kennels.” Take your pick. Face it, folks, you are leaving the supposedly most important person or persons in your life for eight or nine hours per day with strangers, who are trusted with giving them the love and skills that will be the foundation for the rest of their lives. Many parents now start their kids with daycare at six weeks of age. This is an unspoken national shame. Kids this young can’t tell their parents how they’re being treated. What if their diapers aren’t being changed? What if they’re not being fed? What if a three year old bully is beating up your two year old? How would you know? Face it; anyone who puts their infants or toddlers in day care has traded their children’s welfare for big screen TVs, new cares, and other so-called “necessities” of modern American life.

  22. Clay,
    Don’t demonize daycare. I bet there are some bad ones but most parents I know shop around very carefully. In most “good” daycares at least lead teachers have college degrees. It is true that most workers don’t make a living wage, but they are usually either retired or moms with a few young children (saving on daycare through employee discounts)- and most of them work there because they like children. I heard a lot more horror stories about nannies than about daycare.
    Alex is right that you have to consider future earnings when you are thinking about one or two incomes. In some career paths you have no hope of getting back in after a prolonged hiatus, not at the same level – and if you do get the same wage, it is probably not a professional job thus not worth paying for daycare in the first place.

  23. To working mom: Why *not* demonize something that deserves to be demonized? It’s a myth that most daycares have credentialled staff–in fact, there is no federal regulation, and some states don’t even require a high school diploma. Study after study after study after study has shown that dumping your kids in daycare is harmful emotionally, psychologically, and physically. Even the American Academy of Pediatricians advises against it. (Well, actually, they say it’s okay *if* you can find consistent, loving, developmentally appropriate care–i.e., *Mom*. No way you’re gonna get all that from a rotating pool of strangers who are paid, on average, less than a fast-food worker.)

    My point is, people who put their kids in daycare are making a vastly substandard choice. That’s not even an issue; it’s a fact. The only issue is, is sticking your kids in an institution worth the few extra grand you’re earning? That’s a choice every parent gets to decide for her/himself.

    (Of course, if money is so important, why bother to have the little buggers in the first place?)

    Just because most daycares keep your kids alive doesn’t mean they’re good for your kids. It doesn’t even mean they’re adequate (unless you equate survival with adequacy).

  24. Here is a neat little problem. I have been thinking along teh same lines and I feel that the people visiting this site could help.

    One partner might be making $85K
    The other , after a two year hiatus, will be forced to make only as little as 40K, inspite of post grad experience and degrees.

    The toddler needs to be in day care.
    THP for the second income might be 30K, after a 25% in taxes off the bat.

    The grand parent volunteers to take care of the child at no cost.
    Is this a good solution?
    1)I feel that it is because men and women need to think of a time when they might look into a divorce. They need a career and
    a 401k, some retirement strategies etc.
    2)In the long run, two people working give back more to the society and instill better work ethics in their kids.
    Does this mean that a mom does not miss her angel child???
    Nope! The guilt will hurt her mental and physical health.
    Looking forward to your comments.

  25. I definitely agree that the time spent with my two sons is priceless. It was tough staying at home at first, but now I realize that it is one of the best decisions my husband and I made. Can’t turn back the clock! Nobody takes care of your own children the way you do. Target and Costco rule!

  26. Do you really expect a complete stranger, working for a corporate day care chain, making slightly more than minimum wage, with perhaps no more education than a high school diploma, to provide care comparable to the mother’s and father’s?

    Yep, actually. Most parents are nowhere near as good at parenting as they like to think. You can throw in all the platitudes about love being everything that you want, but the evidence doesn’t bear that out.

  27. It pretty much comes down to if you can have family take care of your kids or work opposite shifts to avoid daycare. If you are paying full shot for daycare,.. why even bother working two jobs. My husband and I both work, but because he’s a nurse (night shifts, etc..) and I have family to take them a few times a week, we can see great benefits from the second job.

  28. Teri, could you comment on how to evaluate the long-term benefit of the second earner’s contributing to a retirement plan? I squirrel away the maximum into my 401(k) plan, sacrificing significant cash now for (I hope) an easier future. I may be working for little in terms of current cash flow, but it should pay off in the future. I could contribute to an IRA as a non-working spouse, but significantly less.

  29. Sarah,

    You bring up a good point. Our strategy when my husband does return to work is to find a job with a good 401k plan or good health benefits (which we don’t have now). Anything that will increase our overall economic standing, without losing much of the benefit of the second wage to taxes.

    My point being, a second wage that mostly goes to a 401k is not as heavily taxed, and will give you much more benefit in the 2-income vs. 1-income debate.

    From a purely economic standpoint, if you can afford the childcare and the 401k contribution both, it would be a very large benefit to give up. Maybe not worth it.

    On the other hand, most people don’t give up a second income based on economic decisions, it’s because they want to be home with their kids. If you dutifully contribute the max for a number of years and want to take a break for a while to raise kids, you may not be so bad off if you contributed sgnificantly to your 401k while you were young.

    I think overall though you will lose more in this case, going to 1 income, since the money you put to your 401k is really tax-free to you.

  30. Pingback: Dave and Katy’s Travels » Two income trap narrowly avoided
  31. My husband and I both work. I have always worked part time, even when our son was a baby, after the 1st year. Now to be home for him my husband works overnight, I in the day. I work a 30 hour week, he a 40. I have flexibility and can work anywhere over the 7 days. My husband was only too glad to take the overnight shift after being downsized and out of work for 2 months (save as much as you can for emergencies-it saved us). We live in a relatively high dollar area where a 900 sq ft condo sells for 300k. I know there are more expensive places, but we have never been able to keep pace with the housing market, so we still rent a 2 bedroom apt @ 1500/mth. I am sure there are cheaper. We have placed value on our two children and sacrifiiced many dreams to see them succeed. Our son is in middle school and our 19 year old daughter is in her second year of college. Together my husband and I make about 65-70k a year. We both have second weekend jobs that consist of 2-3 hours of work, but pay high dollar. We have what we need. We share a car, a small 12k dollar car with exceptional gas mileage. We get free movies since our daughter works at the theater and our apartment has a great pool and an excellent gym. With all that, you would think we have it made. Then why do I feel like I am missing something? Like I am being short-changed? I don’t know. A beach vacation would be fun, we pack a tent and hit the sand overnight through our state parks, but a hotel with a shower and a ceramic toilet, that would be nice. A backyard for my kids would be nice, but they are too old for that now, I suppose. My own new car, a car for my daughter. My kids having their own rooms, that would be a dream come true. Some days I feel like I failed, but mostly because I have been lured by marketing and jealousy.
    We use every penny we bring home wisely, just once I want to go to the grocery store without a list or look for a car based on my inner child. Bright side, kids college paid, retirement funded, health, dental, stocks, bonds…but still I dream of complaining about cutting the grass or painting the house. Silly, but I can’t help it.

  32. Hi Terri,

    Thank you for providing this information. It makes me feel so much better that the decision my husband and I have made together, that being for me to stay home and raise are yet unborn child, is actually not a bad one in regards to finances and every other aspect.

    I will refer to this blog on my web site.

    Kind Regards,

  33. finally a clearly written, logical post offering good personal finance advice based on facts. i’ve been stumbling finance articles for months and this is one of the few that didn’t make me want to strangle the author for wasting my time and his/hers. So thank you for contributing some substance and not another 1500 word post on if you save a dollar a day you can be a millionaire by the time you’re dead.

  34. This might be a little off the subject, but I liked the post and wanted to ask. My wife is pregnant and due in August, can I start withholding 1 on my pay check? if so can my wife do the same?

  35. And what happens when mom quits her job because it didn’t net enough profit over daycare and taxes? And because she couldn’t manage 2 full time jobs – work and kids? She has lost experience, no health care, no financial earnings of her own. And then her husband is depressed at work, comes home and yells at her to get a job, and divorces her when she can’t make enough at a part time gig.
    I’ll tell you what happens – she and her kids are in trouble. That, my friends, is why 44% of divorced women and their children are in poverty in this country. Not everything measures up at the instant you measure it.

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