Discussions

I am needing some advice on what to do about my overtime hours.  
I am a nurse in long term care and currently working quite a bit of overtime. We have the option of banking our overtime, up to 80 hours, or having it paid out on each cheque. There are four times a year that we can have our overtime paid out on a separate cheque.  
It seems that no matter which way I do it, paid on each cheque or waiting for a separate cheque, I lose half to income tax.  
So what I’m wondering is what is the best way to have it paid out - separate or every two weeks? Any other ways to have it paid without losing so much?

maybe talk to an accountant?

not matter which way it is paid, at the end of the year tax is due on the excess of income over allowances. So overall you will pay the same amount of tax.  
However, if you invest that overtime money into a TFSA (tax free savings account) then you will escape tax, but will not have the money in your pocket.

The amount of tax you owe is calculated by what you earn at the end of the year. If you pay more tax off your pay that what you owe you will get it back at income tax time. If your overtime puts you in a higher tax bracket it could cost you a bit more than if you took the time off with pay instead.  
checking with an accountant is always a good idea to see where your best options are to save more for yourself and pay less tax.

The tax you pay on your OT will be the same no matter how you receive it.  
 
It's a common misconception (how often do you hear people saying that they got a raise that 'pushed them into a higher tax bracket') that the size of a cheque affects the tax percentage.  
 
Doesn't matter if you make 10K or 200K, you pay exactly the same up until the first percentage cutoff.  
 
I don't know offhand our percentages, but for example, you earn 80K a year, that means 0-10K you pay the lowest taxt rate, 10-20K you pay 25%, 20-30K you pay 30%, and so on.  
 
This is of course ignoring tax saving opportunities like RRSP/Charitable Donations/etc, but there is no practical way to pay less tax on your yearly income.

I agree with the rest that there's really no way to pay less tax, because it's based on your annual expected income. Also, keep in mind that with your regular pay, the calculation is more complex because things like your personal exemption, CPP and EI contributions are taken into account. Assuming you have already maxed all those out with your base salary, I believe the percentage withheld on overtime will be higher than your base salary no matter how it's paid out because those deductions are omitted.  
 
Putting money in an RRSP allows you to defer the tax to when you're theoretically in a lower tax bracket, but you will still need to pay the taxes up front and get a refund at tax time. Unless you are regularly making large RRSP contributions, then I believe you can request a waiver to have less tax witheld, but you would need to talk to the CRA or a tax advisor about that.

Better half does the separate cheques just for over time and summer months lots of O/T and has less tax taken off brings home more pay $$$  
Your tax is based on the money earned on each cheque and overtime hours results higher income tax %. been taken off , so we worked it out and it’s a lot better “take home pay” on separate cheque's.  
 
This is what we do -every summer our choice  
 
Edited by Mac72, 2021-06-03 11:20:13

If it is a option for you and allowed, you could talk the corresponding number of of days off with pay.

Sorry to be the bearer of bad news, but at the years end you will still pay the same tax on the income, irrespective of how many cheques.  
As you are probably charged by the bank for each cheque you are actually slightly worse off.

You said you could bank up to 80 hours. That's what I would do. Once you've used those 80 hours, (if you can't bank another 80) then I don't think it really matters how you take the money, as like others have said, it all depends on your yearly income as to what tax bracket you are in and how much tax you will pay

I thought OP was talking about some extra take home pay - like an extra money now to use. . Every month we get like an extra 1/2 (Approx 40 hrs) pay cheque gives us extra cash now that’s what we want now . Of course it’s all income come filing of Tax Return April of next year and tax has already being taken off each cheque.  
 
When it’s 80 hrs reg plus 40 overtime the pay is taxed on higher bracket that week so you don’t see much but on an extra cheque we do.  
 
Guess hard to explain but it works for us and we’re happy with it.  
 
 
Also we have never had any charge to do deposit of our pay cheques at our bank.  
 
Edited by Mac72, 2021-06-03 13:24:50

Others have done a good job explaining it. What I will add is that the tax that comes off your cheque is an ESTIMATE of what you owe. A reckoning is done when you do your income tax after the end of the year and find out what you truly owe, and if you owe more or get a refund.

....would be the way I would do it if you are full time. If part time, I would get overtime paid on each pay day instead of banking the hours. It depends on your EFT. But also, I would save some hours to take some as time off too.

Payroll taxes are calculated based on the gross earnings in the pay period...anyone else remember the old green payroll tax calculators when we had to do it manually

We had a lot more work for payroll back then! No computers worked in payroll over 10 years all manual.  
 
Guess that’s the message I was trying to get across payroll taxes on gross earnings in pay period.  
 
BigMoe - Dog Walker — you’re right on!,  
 
Edited by Mac72, 2021-06-03 14:01:51

That’s the trouble with working too much overtime, the government takes most of it. Been there, got the T shirt.

You gotta earn more to pay more. It’s irrelevant if it’s overtime, and like others have said, if you normally earn $60,000 year, but your overtime pushes it to $80,000 a year, you will pay the exact same tax as someone that regularly earns $80,000 a year without overtime. Just because they took a big chunk of any given cheque it evens itself out at income tax time by a refund.

You still pay tax on the money you put in a TFSA, you just don’t pay tax on the money earned through investment in the TFSA. If you want to defer tax take the pay and invest in a RSP that WILL defer your tax to a later time in your life when your income may be reduced.

When I had a proper job ( prior to self employment) Dad warned me about working too much overtime and he was right. Whatever you do the tax man gets a chunk of it in the end.  
The only real way when employed to get ahead of tax a little is to maximize your tax free investment allocation each year.  
Two things in life are certain , death and taxes and that’s a fact!  
Get advice from a good accountant is the best thing anyone can do.

Take the OT as time off, that way you reap 100% of it and the government gets nothing.

As many have said, tax on overtime is always calculated for the 2 week pay period, so in the eyes of the government, if you got that much gross pay in 2 weeks, they take that and multiply it by 26 to give the annual rates, etc. Many have said to take the time off that is banked. I try to do that, but we are always so busy that I can never get the extra time off so my hard earned overtime sits on paper doing nothing for me. What I have done before if its an option for you, is if you have any form of direct RRSP plan for work, could payroll just contribute directly to that RRSP account? Extra cash is always nice but that might at least see the true value stay in your net worth, and not sit in Government pockets until you complete your taxes. It does work its way out in the end, but very challenging!

this could not be further from the truth.  
 
your income tax is not paid based on whether your earnings were from regular time, over time, vacation, sick time etc. it's just dollar for dollar. you may pay more tax off that cheque because some of your income ends up in a higher bracket, but at the end of the year your income is totalled and you are taxed according to your entire income as a lump sum.  
 
also, tax free investment allocations are a great way to not pay tax on investment income - but that's the only place it's saving you money, is the taxes you don't end up owing on the interest you earn on your own investment. TFSA's also have nothing to do with employment or income.  
 
to the OP - if you don't want to hire an accountant to answer some of these questions you can use the government's PDOC to run some scenario's for yourself on your different options. many companies require the use of the "bonus method of tax" on any lump sum payments outside of regular earnings, so you can ask your employer if they use that - it's an option to factor that into the PDOC calculation as well.

The more someone earns the more tax they will pay and overtime can quickly take you into that higher bracket leaving you not much better off.  
Maximizing ones tax free investment allowance is a straightforward way to provide some relief versus the taxes that one pays out of their income.  
It is always a smart idea (and not that expensive) to seek professional advice from an accountant who at the very least will earn what you have to pay him and at year end you may come out ahead a little.

sorry but you are incorrect yet again. taxes are calculated on an incremental system so only a portion of your income ends up within each tax bracket. even if you earned $1,000 over the bracket ceiling, only that $1,000 is taxed at a higher rate, not your entire income. saying that someone is "not better off" to work overtime is absurd. working some overtime is not going to "quickly take you into a higher bracket", it all depends how much you have made through the entire year anyway.  
also - tax free investments are not deducted from your income so they do not reduce the tax that you owe through employment.  
if you would like more information or professional advice i would be happy to help provide my CPA tax planning services through my business so that you are not taking poor advice that has been given here.

Since you pay taxes based on your yearly income, as most have said, it makes when you take it - irrelevant. My personal advice is to keep as much of it banked as you can. This way, when you get to a point where you're burned out and can't work for a bit you will have that in reserve. You can take the OT payout and continue to support yourself while everyone else decides if you're still capable of doing your job or not.

I employ a chartered professional accountant to prepare the return for my business and I am very happy with the work that he does each year for me.  
When someone is employed the scenario is entirely different and I was employed for 20 years as a skilled mechanic in 4 dealerships. Worked plenty of overtime and was not much better off after tax. Like I said been there and got the T shirt. .  
As for tax free investments I never claimed that they reduced the tax through employment. They can however reduce your overall tax burden and are a useful tool to build your net worth so well worth looking into .  
Individuals should always seek advice from a good accountant .  
 
Edited by Farmergeorge, 2021-06-04 20:32:17

If your work has a savings fund plan or investment plan you can UP the contribution or MAX out the amount you contribute before taxes then in later years withdraw the investment at a lower tax rate..plan for retirement with the extra.

To those who have suggested banking the OT and taking it in days off, I repeat: I’m a nurse in long term care. We are so short staffed right now, and we can only get banked time off if regular staff covers, so this is not an option. I was able to speak to my accountant and she advised getting it paid out on each cheque would work best - something about how the payroll deductions are calculated.