quick income tax question

[ImportPsycho]

usually, I pay about 15% of total income per pay cheque(2 per month)

on my last pay cheque, I got more than double the amount of my usual pay because I cashed out unused vacation pay from last year. this time, I got dingged 30%.

does that sound correct?

[lowside67]

You got dinged 30% of the total value of the cheque or you paid twice as much income tax as usual because you got twice as large of a cheque?

The effective rate should not change but you do pay tax on vacation pay so you should be paying twice as much tax as usual in terms of DOLLARS, but not rate.

Simply put, if your cheque is approximately twice as big as usual, you should pay approximately twice as much in income tax, if you were paying 30% you would be paying 4 times as much income tax.

Mark

[ImportPsycho]

I got dinged 30% of total pay amount, not twice the amount of the usual tax I pay.
actually last pay cheque was almost 3 times as much as usual pay.

just to make it easy to understand
let's say I get $1000 per pay chq, I usually get deducted $150 in tax
but if last pay cheque was $3000, I paid $900 in tax, not $450

is that weird?
I should check with company accountant if that's way off....

[lowside67]

That seems abnormally high, yes.

[radioman]

When you get paid a bonus or vacation pay in a paycheque it adjusts and assumes you make that paycheque on a regular basis and deducts more tax. It happens when I get my quarterly bonus'.

If you're making $1000 every 2 weeks the system knows you're making $24k a year.
All of the sudden you get $3000 and the system thinks you're making $72k a year and adjusts tax accordingly.

This is my understanding of it and I believe it to be correct.

[lowside67]

That is dependent on the accounting software. Ours asks us to set the base salary level each year at the beginning for estimating tax treatment of bonuses. Ours wouldnt automatically quadruple based on one payment.

[ImportPsycho]

Originally Posted by radioman

When you get paid a bonus or vacation pay in a paycheque it adjusts and assumes you make that paycheque on a regular basis and deducts more tax. It happens when I get my quarterly bonus'.

If you're making $1000 every 2 weeks the system knows you're making $24k a year.
All of the sudden you get $3000 and the system thinks you're making $72k a year and adjusts tax accordingly.

This is my understanding of it and I believe it to be correct.

That sound like the case, is this something I should contact payroll and get corrected or just leave it?

[radioman]

I don't think it's something you can have changed. I'm just waiting for my tax return to be a little bit bigger.

[Szeto]

Originally Posted by radioman

When you get paid a bonus or vacation pay in a paycheque it adjusts and assumes you make that paycheque on a regular basis and deducts more tax. It happens when I get my quarterly bonus'.

If you're making $1000 every 2 weeks the system knows you're making $24k a year.
All of the sudden you get $3000 and the system thinks you're making $72k a year and adjusts tax accordingly.

This is my understanding of it and I believe it to be correct.

^this. When I got my commission I was like "wtf... almost 1/3 gone in taxes"

[bobbinka]

The amount of tax you normally pay is a combination of both federal and provincial tax. Each side of the tax return has its own tax credits and deductions that help you reduce the tax you have to pay on each respective side. When you are first start working for a company, you fill in a form to let your employer know what kind of tax credits you may be claiming. This gives your employer a way of gauging how much tax to deduct from your regular pay. As a result of all of this, the % of tax withheld from your regular pay can be much different than what the actual tax brackets are because everything is averaged out.

When you are paid anything outside of your regular pay, it is taxed differently because the tax rate for your regular pay has already been averaged out. Using the same rate for this extra payment would make it "incorrect". As a result, payments outside of your regular pay (such as bonuses and overtime) are taxed at your marginal tax rate (federal + provincial rate added together).

based on the % you provided (you said you were dinged 30%), your regular income would be in the range of $43k to $75k, correct? in this range of income, your federal tax rate is 22% and provincial tax rate is 7.7%. as a result, your marginal tax rate is 29.7%, which is what all your irregular payments would be taxed at.

or if you just were rounding down to 30%, then you could be in the 75k to 86k range, which would put your marginal tax rate at 32.5%

having said that. when you file your tax return for the year the payment belongs to, if too much tax was taken off, you will get it back as part of your refund (or a reduction in what taxes you would have owed). In the short term, it sucks not to get the money now, but in the grand scheme of things, it works out to be exactly the same thing.

[ImportPsycho]

Originally Posted by bobbinka

having said that. when you file your tax return for the year the payment belongs to, if too much tax was taken off, you will get it back as part of your refund (or a reduction in what taxes you would have owed). In the short term, it sucks not to get the money now, but in the grand scheme of things, it works out to be exactly the same thing.

that's perfect, nothing to worry about
thank you