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Saturday, March 25, 2017

Two Jobs and Your Tax Bill

Posted by Tim Stobbs on September 15, 2010

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.

  1. 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.
  2. 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.
  3. 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?

Comments

4 Responses to “Two Jobs and Your Tax Bill”
  1. deegee says:

    Several years ago, I created a skeleton version of my federal and state income tax return linked to a spreadsheet version of my checkbook. This enabled me to generate a potential (estimated) income tax return throughout the year. I included with the income tax returns entries and worksheets for dividend and cap gains income, both of which had zero taxes withheld.

    This became more and more useful as my dividend and cap gains income grew as a percentage of my total income. Now that I am retired, all of my income is of that type and I have to pay estimated taxes at the end of the year and, in 2010, have to pay some before the end of the year because I had some large, unexpected cap gain distributions midyear instead of at the end of the year.

    Recognizing the so-called “safe harbors” to minimize my federal taxes due is important. Similarly, realizing that paying most of my state income taxes before the year is over enables me to deduct them on that year’s federal income tax return instead of waiting another year to deduct them has saved me some money sooner.

    It is also important to keep track of any law changes affecting taxes due as well as the indexing of the tax brackets so the calculations will be correct.

  2. JMK says:

    We live live fairly frugally and save 35-40% of the take home pay of our primary jobs. We intend to retire as early as possible and paying off the mortgage asap is the major factor controlling when that happens. So I took an extra PT job and ALL the money I make it tagged for extra mortgage payments. I have them tax me at the lowest rate so my paycheques are as large as possible. I estimate the total amount I’ll make in the year, and the additional tax I’ll owe. The first few paycheques of the year are put into my RRSP until I’ve contributed enough to result in a refund large enough to cover the tax. Once I’ve contributed enough to negate the tax I’m not having deducted, I then contribute every cent I earn to our mortgage. The sooner the payment is deducted the more impact it has. My mortgage doesn’t have any restrictions on how often I make extra payments so I do it every week since that’s how often my PT job pays me. My only restruction is a cap of ~$35k total extra payments per year. I used to wait until the last few pays of the year to make the RRSP contributinos I’d require to result in a zero owed tax situation, but one year I had my hours cut back severely during those weeks and had to steal the extra contribution money from our regular budget. Now I do those contributions for the whole year first and then the rest is gravy.

  3. JMK says:

    My cousin always had between 3-5 PT jobs simultaneously while in highschool and university. When she graduated and began her first year of teaching she also bought her first home. She continued to do at least 3PT jobs as well, so she could furnish her new home. She didn’t realize however, that she now needed to have more tax deducted at all her PT jobs. Needless to say she got a shock with she did up her taxes with her new career salary on top of all the PT work. I gather her parents loaned her the cash to pay her tax bill on time, and she quickly paid them back, but it certainly was a less on learned. Just a rookie mistake for someone used to making far less and not really thinking about moving into a different tax bracket. She also had to rethink how much extra it made sense to earn with her PT jobs. If that income pushed her into a higher tax bracket was if really worth it?

  4. Canadian Dream says:

    JMK,

    Your right everyone has to consider the tax situation on the extra income they get. At a certain point you might well be getting very little back in income for the amount of work you are putting in.

    Good look on your plan. It looks like you are doing great.

    Tim

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