If you have ever worked two jobs in your life you know it can be a little stressful at times. It often can become very stressful when you finally get around to doing your taxes and realize that you weren’t paying enough tax all year. So how do you avoid an end of the year surprise tax bill? Actually it’s not that hard with a few steps.
- Determine what you should be paying in tax. The problem with two jobs is they both only assume you have just one job. So at least one of your jobs should be taxed at your marginal tax rate (for example 35%) while typically your employer is only taking off the lower tax rate (for example 26%). That leaves you holding a tax bill for the missing 9% (35%-26%). To find out your tax rates just head over to Taxtips.ca and find your province. You just look up your rate for both jobs as a single job and add them together to find your marginal tax rate.
- Pay more tax during the year? A common solution to knowing you are going to have a higher tax bill is to fill out at TD1 form at one employer to have the additional tax deducted. This way you make sure you are paying the missing 9% or what ever you owe. The problem with this method is you are assuming that you will just pay the tax bill instead of looking at a different option.
- Avoid the tax bill entirely. Another solution is the save your extra ‘tax owing; money into an RRSP if you have the contribution room. That way you are building some savings and creating a tax break to offset your extra tax bill. This becomes a little easier to save since you can use the very money you would owe in tax to fund the RRSP.
I’m personally have two jobs this year and I’ve decided to skip #2 and instead I’m using #3. The great thing about this option is it allows you a larger free cash flow during the year to do what you want. For example, for the first half of the year I paid down my mortgage a bit faster and for the last three cheques of the year I’ll be putting the extra money into my RRSP to reduce my tax bill.
This solution seem nice until you realize that getting an accurate estimate of your tax owing can be a little complex as you add in a few extra complications like: investment income, income from a small business, determining your EI and CPP over payment (since they are getting deducted twice) and then any other tax credits you qualify for. Basically to do it right you would have to do your taxes twice: once as an estimate and then again when you file. I’ve decided to skip the detailed estimate and use a rough one. I might be wrong, but I should at least be close.
If you have two jobs or multiple income sources, how to you plan for your taxes?