I’ll probably make less than the basic personal amount this year (around $13k?), but I’m still seeing deductions on my payslip. Why is that? Should they be taking off this money?
Companies will usually take one of two approaches when it comes to deducting money from an employee’s pay cheque. The first option is to do what’s called “taxing every dollar”. Basically the employer will tax all pay as though there was no tax-free basic personal amount. In this case it wouldn’t matter if you made $8,000 or $80,000, they’d still take off a portion of your income for income tax.
Why would an employer do this if everyone is supposed to get the first $13k of their income tax-free? This is often done when an employee is doing part-time or seasonal work and the employer believes the employee will likely have another job or another form of income. This avoids the issue of two separate employers both giving you the basic personal amount credit (amounting to about $26k). This would then leave you owing a large income tax bill at the end of the year because neither employer took off enough deductions.
It sounds like your employer may be taking this “tax every dollar” approach as they likely believe you will have a second source of income which will fill in your $13k basic personal amount over the course of the year.
The second approach employers will take is to tax you as though you get the first $13k of your income tax-free, but take off deductions at a rate which assumes you will work full time. In other words, if you make $15/hour you’d make around $30,000 per year if you were a full time employee. The company may be taxing you as if they expected you to work full time and make the full $30k.
The company doesn’t want to not take any deductions for the first three months of the year and then suddenly start deducting large amounts of money the other nine months. That would throw off everyone’s budgeting. To avoid making everyone’s paycheques jump and dive every year, companies work out the average amount they’d need to deduct every month if you were working full-time and apply that to your paycheque.
This second approach is useful if you’re working full time hours at one job, but removes too many deductions if you’re part-time at one job. It also doesn’t take off enough if you work multiple jobs.
Knowing this, what should you do? Well, if you only have this one source of income and no other jobs then you can ask your employer to use the second method of calculation. This will lower your deductions now and put more money in your pocket. Just keep in mind that if you have other income later in the year you may end up owing taxes later.
Another approach you can try is, assuming you will have no other income this year, asking your employer to not take off any deductions. This is risky because it means you get all your paycheque now, but if you miscalculate or get a second job you’ll probably owe a lot of income tax later.
A third option is to simply leave things as they are now. You will get any income tax your employer paid back when you file your tax return next year. Any tax you paid on the first $13k you earned will be returned to you. This means waiting longer to get your money, but it avoids any risk associated with having fewer deductions taken off your cheque now.
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