Marginal tax rates & tax brackets – how they impact second jobs, overtime & RRSP contributions.

For 2022, the combined Federal and New Brunswick marginal tax rates, based on taxable income are as follows:

1st $44,887.00 - 24.40%
$44,888 - $50,197 - 29.82%
$50,198 - $89,775 - 35.32%
$89,776 - $100,392 - 37.02%
$100,393 - $145,955 - 42.52%
$145,996 - $155,625 - 43.84%
$155,626 - $166,280 - 47.22%
$166,281 - $221,708 - 49.68%
$221,709 and up - 53.30%

To illustrate why these rates matter, let’s assume you have a full-time job earning $30,000 per year before mandatory deductions and you are considering a second part-time job to earn extra income.  Let’s also assume your full-time job deducts just enough so that you typically do not receive a significant refund or have a significant balance owing at tax time.  If you pick up a part-time job where you expect to earn an extra $10,000 per year before deductions, your marginal tax rate would be 24.40%; to avoid any surprises at tax time, you should ensure taxes deducted from your part-time job equate to 24.40%, or more, of your gross income.  You can arrange this by completing a TD1 upon starting the part-time job and requesting for extra tax to be deducted.  If you do not do this, deductions off income from the part-time job will be calculated as if you have no other income and likely lead to a significant tax bill on your next return.  This situation also applies for jobs where you can earn tips.  Your regular salary might be subject to just enough deductions so that you do not have a significant balance owed to Canada Revenue Agency come tax time.  However, if you were to also report $10,000 worth of tip income that has not been subject to deductions, you would want to ensure you set aside 24.40% or more of your total tips to cover the extra tax that would be owing as a result of earning tips.  In either case, if you are trying to earn extra income to get ahead of debt, you do not want to be creating a new debt with Canada Revenue Agency as future tax returns are filed.

Someone already earning $50,198 or more, before deductions and considering a part-time job earning $10,000 per year (before deductions) or more, should plan to have approximately 35% of their gross part-time income withheld for taxes to ensure no surprises at tax time.

What if you earn $45,000 per year before deductions and are worried that taking overtime shifts will put you in a higher tax bracket?  If you could make an extra $10,000 per year (before deductions) working overtime, the first $5,197 would be subject to the marginal rate of 29.82% and the balance, $4,803 of overtime earnings would be subject to the higher rate of 35.32%.  Working overtime does not subject your entire overtime income to a higher tax rate, only the portion that creeps into the next higher bracket.

Are you thinking about starting RRSP contributions?  These marginal rates will also give you a "rough" idea of what kind of tax refund to expect based on your RRSP contribution. A person earning $60,000 per year before deductions, considering an RRSP contribution of $5000 could expect a tax refund of approximately $1766 (5000 x 0.3532). They would get the benefit of $5000 sitting in their RRSP for a cost of only $3234 after the tax refund.  A person earning $110,000 per year before deductions, considering an RRSP contribution of $5,000 could expect a tax refund of approximately $2126 (5000 x 0.4252).  This person would get the benefit of $5000 sitting in their RRSP for a net cost of only $2,874 after allowing for the tax refund on contributions.  The higher your income, the more beneficial an RRSP contribution can be.  Alternatively, if you typically earn an amount within the first bracket ($44,8887 or less), and do not expect any significant change, unless your employer offers a Group RRSP with matching contributions, you might be better off using a TFSA instead to save or invest.

If you are looking for advice, or a second opinion about your debt, it doesn’t cost a thing to talk about your options. Every situation is unique and viable options for dealing with debt, besides a bankruptcy or proposal, might exist. Together, we will spend our time discussing those options, personal finance best practices, and suggestions for any gaps that might exist in your current financial plan. If we determine a bankruptcy or proposal might be worthwhile options, Jaime Johnson & Associates is the only local firm where you will deal exclusively with a licensed insolvency trustee for every aspect of your file. We pride ourselves on ensuring the best quality of service is provided. There are no departments, no call centers, and no layers. Together, we will ensure you are confident in making an informed decision and we will work on putting your new financial plan into place.  For a free consultation, please call or text (506) 645-1814 or email jaime@tackledebt.ca; or visit www.tackledebt.ca.