It’s tax season. And for many employees this means a nice little tax refund when they file their taxes.
But what happens if you file your taxes, and you unknowingly OWE the government money!!??
This happens all the time when people aren’t careful. And when it does, it can be devastating to your budget.
We’ll tell you how TD1 forms can help you avoid this unnecessary pitfall from happening to YOU.
Why Would I Owe Money At Tax Time?
Taxable Income – The Basics
As an employee, your income tax is “deducted at source”. That means your employer is responsible for calculating the amount of tax you owe each payday. Your income tax contribution is then deducted from your total wages earned on each paycheque. And then your employer pays this money to the government on your behalf.
So far so good?
Now, the calculation for how much tax should be deducted each pay cheque is complicated. Your employer will use either the government of Canada’s website, or specific payroll software (like WorkSolute!) in order to perform this calculation.
We won’t go into the calculation in detail (trust us, we’re just as happy as you are on this one!). But we want you to know that the concept of “Taxable Income” is important.
Taxable Income is important because it determines which “tax bracket” your Taxable Income falls into. Based on your tax bracket, you are then taxed at the associated “tax rate”.
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In general, the more Taxable Income you earn, the more likely you will be put into a higher tax bracket, meaning a higher tax rate. The higher the tax rate, the more tax you will owe.
This isn’t necessarily a bad thing, as it means you are also making more money. But it becomes a problem when you are taxed in the incorrect tax bracket during the year (we’ll cover that below).
To calculate tax owed on Taxable Income, you must take the total amount you earned from all employers, then subtract any deductions for which you qualify. The key here is from ALL employers (we’ll get into that later).
If you’re one of the few who wants to go deeper into this subject (we will pray for you…), you can find lots of information on tax brackets and rates here.
SUMMARY: Income Taxes Are Calculated And Deducted From Each Paycheque. The Amount Of Tax Deducted Depends On Your “Taxable Income”. The Higher Your Taxable Income, Generally Speaking, The Higher Your “Tax Rate”, And The More Tax You Will Owe.
It’s Important That Your Taxable Income Is Accurately Captured From All Employers In Order To Help Ensure You Will Be Taxed At The Correct Tax Rate.
Taxable Income – What You Need To Know
So now that we know all about Taxable Income, let’s look at where people get into trouble.
Remember the complicated payroll calculators? Well, they’re actually really good at their job. But problems can arise when the numbers put into the payroll calculator, don’t reflect your actual circumstances.
This can occur in many ways. But the main issues employees often run into generally fall within two categories:
- “Taxable Income” Is Too Low – RESULT: You will owe money!
- “Taxable Income” Is Too High – RESULT: You won’t have access to all the money you should each paycheque.
Taxable Income Is Too Low
Your Taxable Income can be artificially too low when you have multiple jobs.
Employer #1 inputs your wages into the payroll calculator for a given paycheque, and from that information the calculator estimates your annual earnings for Employer #1. And Employer #2 inputs your wages into the payroll calculator for a given paycheque, and from that information the calculator estimates your annual earnings for Employer #2
BUT NEITHER OF THOSE AMOUNTS ARE WHAT YOU WILL ACTUALLY EARN IN THE YEAR!
You will actually earn the combined total of your multiple jobs. But in each case in the example, your annual earnings with each individual employer are used as the sole source of your Taxable Income. Your Taxable Income is therefore artificially too low for each employer, and you are taxed at a rate that is also too low.
When you file your taxes and submit both T4’s, the government will see that you earned more than either of the payroll calculators thought you would. And this could mean that you actually OWE the government money.
Not cool… But TD1 forms can fix this. Keep reading.
SUMMARY If You Have Multiple Jobs, You Are At Risk Of Owning Money Come Tax Time Unless You Submit TD1 Forms.
Taxable Income Is Too High
Your Taxable Income is too high when you have not taken advantage of the tax deductions available to you.
Again without getting too far into it, “deductions” are subtracted from your total employment earnings to arrive at your “Taxable Income”. For those keeners out there, here’s some more information.
When your Taxable Income is artificially too high, you pay more tax each paycheque. Meaning that you have less money available at the time to buy what you need. Now, you will get this money back when you file your taxes (as long as you claim your appropriate deductions at that point). But this is money that is often very useful during the year.
What causes missed deductions?
Everyone has basic deductions that are taken into consideration automatically. However, people often miss deductions that are triggered by changes to life circumstances.
There are many deductions available. However common deductions that are triggered by life changes and are often missed include:
- You have a new baby,
- Your elderly or disabled parent moves in with you,
- You or your child starts university or college, or
- You turn 65.
For all available deductions, visit the government of Canada website.
SUMMARY: Ensure You Know What Deductions You’re Entitled To And Update Your TD1 Forms When A Change In Circumstances Dictates That You’re Able To Claim Additional Deductions.
TD1 Forms – Ensure The Payroll Calculator Knows Your Reality
Now. That’s a long wind up to tell you that TD1 forms are your friend. And that you should use them to ensure you are paying the most accurate amount of tax possible at any given time.
There are two types of TD1 forms: federal, and provincial/territorial. Both need to be filled out. These are then submitted to your employer, who will update your payroll so that your tax deductions most accurately reflect your reality.
To download the federal and appropriate provincial/territorial TD1 forms, visit the government of Canada website. It’s easy to use their fillable PDF, which is then emailed directly to your employer.
SUMMARY: Ensure You’ve Submitted Both Federal And Provincial/Territorial TD1 Forms To Your Employer. This Is Particularly Important If You Have More Than One Job, Or Have Had A Change In Your Relevant Life Circumstances.
Good luck with your TD1 forms! Do you have any questions? Do you have a tax horror story? How did you overcome it? Comment below!