# Taxes on Secondary Income



## adampeps (Jan 21, 2011)

Hi all,

I've been fortunate enough to make a decent amount of money outside of my regular job that I am not taxed on. Last year (and this year), I find that I essentially owe about 36% on this extra income when it comes to tax time. To me this number seems incredibly high and I don't really understand why it is. For instance in my regular job, the amount of taxes taken from me isn't even close to this number. However when I add up all of my expenses at my regular job (CPP, EI, taxes, Group RRSPs, etc) and divide by my gross income it comes out to about 32% that I lose on gross income. 

So is the reason I owe so much on the secondary income due to the fact that I am not able to contribute to CPP, EI, etc? 

Thanks!


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## Homerhomer (Oct 18, 2010)

no, it's because tax brackets, the more you make the more tax you pay and the tax changes based on tax brackets, your job calculates the payroll assuming this would be your total income for the year so your lower tax brackets are used up there, your side job it added on top of it when you file your tax return so obviously the tax is higher. 36% makes perfect sense.


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## adampeps (Jan 21, 2011)

Homerhomer said:


> no, it's because tax brackets, the more you make the more tax you pay and the tax changes based on tax brackets, your job calculates the payroll assuming this would be your total income for the year so your lower tax brackets are used up there, your side job it added on top of it when you file your tax return so obviously the tax is higher. 36% makes perfect sense.


Thanks for the reply. The only problem that I still don't understand is last year it wasn't a huge difference. Essentially I made $7,000 extra which isn't huge. However so far this year I am already past that number. But when filling out last years taxes, that extra $7K worked out to an extra 35-36% of taxes to be paid. I would not think the bracket would be that much different? Plus isn't the tax bracket at 22%-26%, and not 36%? I'm also a bit confused about how provincial tax plays a factor in all of this. For instance, this calculator shows NB as 35.46%.

Thanks!


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## adampeps (Jan 21, 2011)

EDIT: I realized now where I was going wrong this whole time. I was misunderstanding average and marginal tax rates. I was confused why I wasn't taxed at 35.2% for my regular income. Now I see that I am taxed each level appropriately and any additional like my secondary income is in that new marginal rate. Stupid me.


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## Spudd (Oct 11, 2011)

Let's say you make 50K per year at your job. You get taxed on this in NB as follows:
first $39,305	24.68%	
over $39,305 up to $43,953	29.82%	
over $43,953 up to $78,609	36.82%	

The average tax rate will be somewhere between 25% and 37% (I'm too lazy to do the math, but most likely somewhere around 30%). 

Any new money you make on the side will be taxed in the top tax bracket (36.82%) because your work income already filled up the lower tax brackets. If you are lucky enough to get enough new money to push you into the next tax bracket after that, then that money will be taxed at 38.5%. 

http://www.taxtips.ca/taxrates/atlantic.htm


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## Homerhomer (Oct 18, 2010)

the numbers will change depending on your income, for example if you only made $40k from your job not only you will pay income tax on your side job but also 9.9% CPP. Don't know what your tax brackets are, but if you are in NB and your marginal tax at your income level is 35.46% and you have calculated tax on extra income of between 35-36% than you are bang on.


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## Guban (Jul 5, 2011)

Another point is that your regular job will have your personal amounts taken into account when it comes to any withholding taxes, while it will appear that your other source of income does not. For example, if you make $15k on job 1, and another $7k on job 2, your marginal rate does not change, but the original income is largely untaxed due to your personal amount, Canada employment amount, any child amounts, ... The income from job 2 faces the full taxation of CRA as your non refundable credits have been used up.


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## andrewf (Mar 1, 2010)

Spudd said:


> Let's say you make 50K per year at your job. You get taxed on this in NB as follows:
> first $39,305	24.68%
> over $39,305 up to $43,953	29.82%
> over $43,953 up to $78,609	36.82%
> ...


You're forgetting the basic personal amount. For New Brunswisk, average taxes on $50k in income is 21.45%. 

http://ultimatecalculators.com/canada_tax_calculator.html

Moral of the story: people way overestimate how much their average income tax bill is.


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## adampeps (Jan 21, 2011)

Hi all,

Thank you again for the help. Where I was making my biggest mistake was on the marginal tax rate. For instance if I make 60K at work, that doesn't mean that I am taxed 36% right away. It averages down starting at the $0 to $10000 level (numbers approximate), then to next level, etc. 

Here is a bit of a followup question. For the most part, this extra income is going into my RRSP account. Eventually thought I will reach the max. What is the best strategy in the mean time? My thought is I should set up some sort of savings account where I automatically put 36% of my income into it each time I am paid secondary income. This would then gain interest for the year. At tax time, withdraw the full amount, pay taxes and keep the interest (minus taxes on that). Is this the best type of strategy for this sort of thing?

Thanks!


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## lb71 (Apr 3, 2009)

If this additional income is large enough that you end up with a balance owed to the CRA when doing your return, eventually the CRA will require you to remit quarterly payments during the year. You'll get a notice from them, saying based on your past returns you need to pay $X per quarter (this is reevaluated mid year based on your recent return). You don't have to pay $X, or you can pay less. However, if when you fill your return the amount owing is greater than some amount $Y, then they will assess you a penalty and/or interest. If you pay $X and you still end up owing more that $Y you will be OK.


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## lb71 (Apr 3, 2009)

Here's more information from the CRA on paying installments:
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/pymnts/nstlmnts/menu-eng.html

This pamphlet is a good summary:
http://www.cra-arc.gc.ca/E/pub/tg/p110/p110-13e.pdf


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## adampeps (Jan 21, 2011)

lb71 said:


> If this additional income is large enough that you end up with a balance owed to the CRA when doing your return, eventually the CRA will require you to remit quarterly payments during the year. You'll get a notice from them, saying based on your past returns you need to pay $X per quarter (this is reevaluated mid year based on your recent return). You don't have to pay $X, or you can pay less. However, if when you fill your return the amount owing is greater than some amount $Y, then they will assess you a penalty and/or interest. If you pay $X and you still end up owing more that $Y you will be OK.


Wow I did not know that. Last year it wasn't anything more than $5K so I think I owed around $1.6K if I am not mistaken. However my projections for end of August already have me at around $15K. Mind you most of this is going into my RRSP account, but even still my spreadsheet has an Owed Tax amount right now projected at $2K by end of august. Eventually without the RRSPs this will be much larger.


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## adampeps (Jan 21, 2011)

lb71 said:


> Here's more information from the CRA on paying installments:
> http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/pymnts/nstlmnts/menu-eng.html
> 
> This pamphlet is a good summary:
> http://www.cra-arc.gc.ca/E/pub/tg/p110/p110-13e.pdf


Thanks, that pamphlet is a huge help. Right now I just pay my taxes at end of the year using a bill payment from my bank account. If I kept paying into my CRA account every month, would it accumulate properly? Would be nice to just get rid of what I owe right away and forget it exists .


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## Guban (Jul 5, 2011)

adampeps said:


> Here is a bit of a followup question. For the most part, this extra income is going into my RRSP account. Eventually thought I will reach the max. What is the best strategy in the mean time? My thought is I should set up some sort of savings account where I automatically put 36% of my income into it each time I am paid secondary income. This would then gain interest for the year. At tax time, withdraw the full amount, pay taxes and keep the interest (minus taxes on that). Is this the best type of strategy for this sort of thing?
> 
> Thanks!


If you are thinking of this, why not put the money Ina TFSA? That way you don't pay taxes on the interest. 

Instalment payments is a problem, as has been previously pointed out, but by putting money into your RRSP, you shouldn't have that problem just yet.


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## PrairieGal (Apr 2, 2011)

I request extra tax to be taken off my paycheque at work to cover taxes I owe on my side income. It's just easier for me that way.


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