Taxes
Employee
The easy way to estimate taxes for your budget is to use your prior year’s tax return and add up the taxes that were paid for the whole year – from your pay cheques and additional am
Summary
This series has described budgeting in 2 main parts. The first part is building your budget accounting for the income sources and expense sources which can be fixed or variable in nature. The budget is broken down into parts that you can control in the short term and parts you can control in the long term for you to see your options in adjusting your budget. The second part of the process is how to make changes to your budget and how to examine its various parts. The changes range from something incremental to a major life decision that can change many aspects of your budget. Much of this is scenario specific as in what parts of the budget get changed are driven by what situation you find yourself in. An extension of making changes to your budget is your money psychology, mindset and habits which underlie your decision process when it comes to money. A budget is a small scene that is part of a larger picture which is your financial situation. As you become more acquainted with the process, you can become the sovereign of your budget and cash flow!
ounts recorded on your tax return. Another source for the taxes paid throughout the year is your last pay stub of the calendar year, or your T4 slip which shows taxes deducted throughout the year only. If your income or tax claims are changing on your tax return versus the prior year, you may have to pay more or less income taxes when you do your tax return. The paragraphs below delve more into the details of the tax estimate.
There are taxes taken at source from every pay period from your pay cheque. The taxes deducted are based on a payroll schedule which assumes various tax credits and that you make a constant annual amount of money from a single employer. The language used in the last sentence is deliberate to show where taxes may deviate depending on you situation.
The tax credits are listed when you begin a new job on a form TD1. Typically, a person will automatically get the basic personal amount and any other tax credits would be accounted for on your tax return when you file it. If you have a situation where you know you would be entitled to other credits, you can indicate them on the form TD1 and the employer will take less taxes off each pay cheque to account for them. As with everything tax, there is also a provincial version of this form for provincial credits. Alternatively, you can request to have more taxes removed (but not less) from your pay cheque for various reasons such as: You want a larger refund, you want to cover taxes from non-employment sources, or as a means of saving.
If you have multiple employers, you will be paying taxes for each of them via your pay cheque. If your salary changes, you leave the employer, you have multiple employers, or you receive bonus compensation, this will change your tax situation.
Self-Employed
For the self-employed, taxes are paid when you do your tax return. If you have been in business for a few years or longer with consistent income, you will have an idea what you will have to pay. Your taxes are charged on your net income, or your business income after your business expenses. If you collect HST, the HST is remitted separately and is removed from your revenue and your expenses for the purposes of doing your income tax return. These HST amounts should be kept aside and remitted when they are due to avoid squeezing cash flows when the HST amounts are being paid. If you are paying taxes each year because your business is profitable, you will likely pay installments periodically to the CRA. These payments are effectively paying taxes throughout the year instead of paying all at once when you do your tax return. Keep these amounts in your budget to keep the cash flows predictable.
