Once again I have managed to overlook an important detail – I hope when people read this blog they can avoid some of the mistakes I am making! Oh well, all in the name of knowledge, right?
In my post a couple days ago, I talked about how I’m going to be rolling in cash by the time I leave on my cubicle throwdown thanks to working what basically amounts to two full-time jobs. I completely forgot that with all this money comes a new tax rate since my jobs are not taking into account the income from the other one when they are doing the income tax deductions.
For example (FYI – these are not my real incomes as I am under contract not to disclose them, but if you care, they are close) if my full-time job paid me $50,000 a year and taxed me on that, and my part-time job paid me $22,000 and taxed me on that, I would have paid $8,632 in tax for the FT job and $2,162 in tax for the PT job (total of $10,794 in taxes paid). However – that’s not the way taxes work. You get taxed on your TOTAL income. So with the total combined income of $72,000 the taxes payable should be $15,166…that is a $4,372 difference from the $10,794 the employers deducted (ie. you are getting a bill from the tax man for $4,372 when you do your taxes next year!) Note that this is based on a full year of income, and I will only be at the FT job for 9 months and the PT job for 5 months. However, I do NOT want to be in Roatan next year and get slammed with a tax bill of thousands of dollars (or even hundreds…or even any).
What should I do?
I called my parents to find out what to do (what, you’re 27 years old and you don’t call your parents every time you don’t know what to do? All right, fine, gold star for you. I still do it though. Thanks mom and dad.)
My dad suggested I figure out the difference in the taxes my employers are deducting and what I should be paying and put it in my RRSP or Tax-Free Savings Account (TFSA). You could also ask your employers to deduct more tax off your paycheques. But by putting it in your RRSP you can use your RRSP contributions against your income which should hopefully lower your taxes payable a bit, however, if you do get a tax bill and need to pay it out of your RRSP you will be taxed on the money you take out. By putting it in a TFSA account you still get taxed on all your income for the year but if you need to take money out of your TFSA to pay a tax bill, you won’t get taxed on it. (***DISCLAIMER: neither my dad nor I are accountants and by no means should this be taken as professional advice. I strongly suggest you seek out a certified accountant if you are in a similar situation.)
For me, if I leave in September and work the hours I’m planning to work up until then, I need to make sure my employers have taken at least $7,600 in tax off my cheques. If not, I will need to make sure I have at least the remainder sitting in my RRSP or TFSA for when the tax man comes calling. If I do get a bill, I’ll be prepared to cover it, and if I don’t get a bill then WOOHOO FREE MONEY!
(Canadians – if you haven’t already bookmarked this site: Canadian Income Tax Calculator then you definitely should! It’s been really helpful for me not only for figuring out stuff like in this post but also in salary negotiations and budgeting.)