Amount of income tax per paycheck?

[homebass]

Hey,

We have been having a discussion at work about how income tax is taken from our paychecks.
My understanding is: the amount of income tax taken is based on the current yearly amount(ytd) for that pay period. For example, if the first pay of the year, the income take rate will be say 15% because the ytd amount is under 50k but later on in the year the ytd will be over that so the tax rate then will be 15% upto the 50k and say 25% for the amount over the 50k. Of course these are rough numbers and not including provincial taxes.

Am I in the right ballpark?

Thanks.

 

[pyrhonn]

@homebass None of this is true. Firstly, many employers may be manually do it and so you’ll get something close to year to date basis if that’s the case (usually). Payroll is supposed to be done on an individual pay cheque basis as if projected out for a year (which someone said, but that’s not the entire story). There’s a TD1 form that you may or may not submit that can change your deduct….for things such as disability credits, even child care. They can then reduce deductions so you close to breakeven and don’t have to lend the govt money all year. Then, there are non recurring payments, but normal annual. Example - bonus. This has its own treatment as per CRA. For bonuses paid exactly at final pay of the year though, it’s a good opportunity for them to just true up for final YTD and make it exact (all other things being equal as they won’t know what else your return involves). Application of taxable benefits to income at year end is common as well, which also means that the final cheque may be influenced by that). Involvement and timing of recurring vs non recurring company matching pension plans can throw things off….and many employers may not adequately account for such things. Age can play a role. If you are under 18 or over 70 (potentially 65-70 as well), then no CPP. CPP impacts your ultimate payable and if not paying CPP, fed taxes needs to increase. This can occur part way in the year. Commissions are often handled separate and not integrated with base pay. Tips, if relevant, may be assumed in the witholding, but not on the cheque - depends on a variety of factors. Tax residency can affect things. This is not likely a common scenario. Bonuses and commissions earned in another country can be more common though and may affect things depending on the tax treaties involved. In short, if you work static hours at static pay per pay period, then will be on the basis of pay cheque amount annualized. If some of the things I mentioned are relevant, you’d have to ask or take the stub and attempt to figure it out. Regardless, the amount deducted has no impact at all once your return is filed and you receive refund or pay owing. It’s timing really. I have lots of clients where we bonus them out and make sure they have CPP covered (both employer and employee) and then just throw some random amount into taxes. We do sometimes do it exactly but given how business owners draw cash and pay for different things with corp cash, makes no difference. All washes out at the end.

 

[homebass]

@pyrhonn Wow, thanks. I think I got it. .
So, answer me this: 2 scenarios, one I get paid out 10 extra shifts on my next pay or if that payout was broken up into 2 or 3 payments throughout the pay year. Does the taxation work out the same at the end of the year or do you lose more tax with the one lump sum payment?

 

[doitforb]

@homebass You would lose more initially if it was paid on one cheque, because the deductions are calculated as if that was your regular paycheque. At the end of the year, you would be paying the same whether it's on a single cheque or 3, so likely end up with a tax refund.

 

[homebass]

@doitforb OK, so it all comes out the same at tax time.

 

[dee1720]

@homebass Now you got it.

So many of my co-workers over the years cry foul after working overtime. Many, many, many, people think you can earn less money by jumping into the next tax bracket. This is impossible. Tax rates are marginal, so you pay a higher rate only on the amount that is in the higher tax bracket.

It all comes out in the wash my friend. Think of tax time as laundry day. lol