Are lump sums always multiplied by 26 for tax?

taxrage wrote: ↑ When people receive salary as a lump sum, is it always multipled by 26 to determine tax withholdings?

Someone was asking on Reddit if 58% percent of a Dec pay being taken off in tax etc. seemed right. Normally I would say yes, but the person also said they had cracked 6-figures for the first time in his/her life.

Seems to me that someone who just hit $100K+ with his/her bonus in December shouldn't pay more than 43%, since there is only one more pay period left in the year. At most, the lump sump payment should be multiplied by the number of remaining pay periods, including the current one.

Someone please tell me it works as I just described, otherwise people are getting ripped off (again).

It is just a withholding tax. It will balance out when you file your income tax return next year for 2020 tax year. Some people actually like higher withholding tax so they will get a refund vs. lower withholding and pay tax later, especially for those people who can't budget.
How are people getting ripped off with a higher withholding tax?

This is discussed in a small amount of detail here:

https://blog.wagepoint.com/canada/how-d ... in-payroll

KyleTO wrote: ↑ https://www.canada.ca/en/revenue-agency ... lator.html

That link doesn't have specific lump sum calculations (or even getting paid once per year calculations).

ml88888888 wrote: ↑ It is just a withholding tax. It will balance out when you file your income tax return next year for 2020 tax year. Some people actually like higher withholding tax so they will get a refund vs. lower withholding and pay tax later, especially for those people who can't budget.
How are people getting ripped off with a higher withholding tax?

Yea! I don't get it either why people don't like to give the government more free loans. I mean c'mon, the budget will bala... no wait, the withholding tax will balance itself! There we go... almost said the wrong thing

Me262A1 wrote: ↑ Yea! I don't get it either why people don't like to give the government more free loans. I mean c'mon, the budget will bala... no wait, the withholding tax will balance itself! There we go... almost said the wrong thing

I am sure your comment is sarcastic. I don't think the poster is talking about giving the government more free loans. he thinks he is being ripped off by higher withholding tax. I didn't say the withholding tax will balance itself. I am saying the total tax payable to the gov't when filing tax return will be the same. I.e. higher withholding tax will result in a higher refund or lower tax owed vs. lower withholding tax will result in a less refund or higher tax owed.

FoFai2015 wrote: ↑ This is discussed in a small amount of detail here:

https://blog.wagepoint.com/canada/how-d ... in-payroll



That link doesn't have specific lump sum calculations (or even getting paid once per year calculations).

The link allows you to calculate lump sum withholding. Getting paid once per year, I'm not sure what that's about, but nobody in the country is being paid once per year with a six figure income, so it's not relevant.

FoFai2015 wrote: ↑ This is discussed in a small amount of detail here:

https://blog.wagepoint.com/canada/how-d ... in-payroll



That link doesn't have specific lump sum calculations (or even getting paid once per year calculations).

Link seems to be invalid.

Yes, because that is how most payroll software works. You enter $20k bonus and they estimate the tax based on equivalent salary for 1 year.

I guess it is a rip off in the sense that you are giving a short term loan to CRA but you can take that up with your employer.

ml88888888 wrote: ↑ It is just a withholding tax. It will balance out when you file your income tax return next year for 2020 tax year. Some people actually like higher withholding tax so they will get a refund vs. lower withholding and pay tax later, especially for those people who can't budget.
How are people getting ripped off with a higher withholding tax?

I look at it this way:

• Payroll systems deduct tax at the appropriate average tax rate for your annual income
• A lump-sum payment might increase your average tax rate from X% to Y% for the calendar year, in which case your total tax withholdings will now be short by ~(Y% - X%) x YTD earnings.
• The lump sump can be taxed at up to the top marginal rate for your province to try to offset that shortfall.

If it's September, and I earn $50K/year and receive a $30K lump sum, I would be getting ripped off if the payroll system multiplies $30K by 26 ($780K) and automatically taxes the $30K @ 54%. For the year, a $30K lump sum increases my average tax rate by < 2%. On the 3/4 x $50K ($37.5K) of YTD earnings, I'm short about $750.

My new average tax rate is what should apply to the $30K, or about 27% ($8100). I also owe an extra $750 YTD. To be fair, the tax on the $30K lump sum should be $8100+$750=$8850, or about 29% of the gross amount. That would put me even with the tax man.

Of course, 27% should also needs to be applied to my remaining income for the year. Since this doesn't happen, I'll be short, but that's not an excuse for CRA to tax the $30K lump sum at the top rate. That would result in a HUGE overpayment and constitute a rip-off.

taxrage wrote: ↑ I look at it this way:

• Payroll systems deduct tax at the appropriate average tax rate for your annual income
• A lump-sum payment might increase your average tax rate from X% to Y% for the calendar year, in which case your total tax withholdings will now be short by ~(Y% - X%) x YTD earnings.
• The lump sump can be taxed at up to the top marginal rate for your province to try to offset that shortfall.

If it's September, and I earn $50K/year and receive a $30K lump sum, I would be getting ripped off if the payroll system multiplies $30K by 26 ($780K) and automatically taxes the $30K @ 54%. For the year, a $30K lump sum increases my average tax rate by < 2%. On the 3/4 x $50K ($37.5K) of YTD earnings, I'm short about $750.

My new average tax rate is what should apply to the $30K, or about 27% ($8100). I also owe an extra $750 YTD. To be fair, the tax on the $30K lump sum should be $8100+$750=$8850, or about 29% of the gross amount. That would put me even with the tax man.

Of course, 27% should also needs to be applied to my remaining income for the year. Since this doesn't happen, I'll be short, but that's not an excuse for CRA to tax the $30K lump sum at the top rate. That would result in a HUGE overpayment and constitute a rip-off.

Just in case you don't know about how the tax system works, when you file your tax return for the whole tax year of 2020, you add up all your incomes for the whole year on your tax return to determine how much tax you have to pay based on the whole year's income. The total tax payable to the gov't when filing tax return will be the same, no matter how much withhold tax was deducted from each of your paycheque. The only difference is how much you have to pay depending how much is your withholding tax deducted already from all pay cheques during the year. You either have to pay more(i.e. if not enough withholding tax was deducted from your pay cheque) or getting refund(i.e. if too much withholding tax was deducted) when filing your tax. You must be thinking that higher withholding tax means you are paying higher total tax for the year vs. lower withholding tax means you pay lower total tax for the year. it doesn't work that way. The tax deducted in each pay cheque is not the exact tax you have to pay because the exact tax is not just based on each pay cheque.

ml88888888 wrote: ↑ Just in case you don't know about how the tax system works, when you file your tax return for the whole tax year of 2020, you add up all your incomes for the whole year on your tax return to determine how much tax you have to pay based on the whole year's income. The total tax payable to the gov't when filing tax return will be the same, no matter how much withhold tax was deducted from each of your paycheque. The only difference is how much you have to pay depending how much is your withholding tax deducted already from all pay cheques during the year. You either have to pay more(i.e. if not enough withholding tax was deducted from your pay cheque) or getting refund(i.e. if too much withholding tax was deducted) when filing your tax. You must be thinking that higher withholding tax means you are paying higher total tax for the year vs. lower withholding tax means you pay lower total tax for the year. it doesn't work that way. The tax deducted in each pay cheque is not the exact tax you have to pay because the exact tax is not just based on each pay cheque.

Er, I know quite a bit about how the tax system works. As per the title of this thread, the question is how does the taxation of lump sums work. There are numerous posts about how the pay period earnings are multiplied by 26 when a lump sum is involved. I gave the example of a $50K wage earner who receives a $30K bonus in September. Overall, this will raise the person's average tax rate by about only 2% for the year, so it's crazy to have 50% or more of the lump sum removed as tax up front.

niche54 wrote: ↑ Yes, because that is how most payroll software works. You enter $20k bonus and they estimate the tax based on equivalent salary for 1 year.

I guess it is a rip off in the sense that you are giving a short term loan to CRA but you can take that up with your employer.

I'm thinking that may be true for OT but not bonuses.

See a good description here.

taxrage wrote: ↑ I'm thinking that may be true for OT but not bonuses.

See a good description here.

lol, yes. this person explained it much better and clearer.

taxrage wrote: ↑ Er, I know quite a bit about how the tax system works. As per the title of this thread, the question is how does the taxation of lump sums work. There are numerous posts about how the pay period earnings are multiplied by 26 when a lump sum is involved. I gave the example of a $50K wage earner who receives a $30K bonus in September. Overall, this will raise the person's average tax rate by about only 2% for the year, so it's crazy to have 50% or more of the lump sum removed as tax up front.

Just file your tax right away when CRA opens up to accept 2020 tax return, usually around Feb, assuming you are getting a refund. Don't argue or loose sleep over about 2 months of worth of investment income you could have earned by investing the lower withholding tax you could have(i.e. no free loan to the gov't for 2 months). How much you would loose with the so called free loan to the gov't? Let me see if you can earn 2% per year interest if you put that money into a high interest saving acct for 2 months, $30k bonus x 50% tax = $15K. 2% of $15k = $300 per year. 2 months of $300=$75. $75 is taxable @ 40%. You will miss $45 you could have earned.

taxrage wrote: ↑ When people receive salary as a lump sum, is it always multipled by 26 to determine tax withholdings?

Someone was asking on Reddit if 58% percent of a Dec pay being taken off in tax etc. seemed right. Normally I would say yes, but the person also said they had cracked 6-figures for the first time in his/her life.

Seems to me that someone who just hit $100K+ with his/her bonus in December shouldn't pay more than 43%, since there is only one more pay period left in the year. At most, the lump sump payment should be multiplied by the number of remaining pay periods, including the current one.

Someone please tell me it works as I just described, otherwise people are getting ripped off (again).

It gets multiplied by whatever their regular pay periods are. So some are 52, 48, 26, 24 and 12. The more pay periods you get, the more that lump sum is going to be taxed, UNLESS, payroll is on top of things, which they usually aren't.

And for example, during the first covid-19 shutdown, we were on paid leave. Meanwhile, a minor injury I had manifested itself, so I did an incident report. I was also told I wouldn't get paid if they had no work for me IF and WHEN we got recalled. We all got recalled at the same time, meanwhile, though, I was out 72 hours of paid work. Normally it goes on sick-time, but didn't because it was going through WSIB. To make a long-story short, they know that WSIB can take time, so they paid me out my sick-time and regular time all on one paycheque. We're paid weekly. So I had 112 hours of work for 1 week. And hell yeah, the taxes on that.

On the bright side, I'll have a great return when I do it in March. That said, I don't like giving the government an interest free loan.

While it would be helpful to know the province, Quebec's top rate is 25.75% ($106,000) plus Canada's top rate of 33% ($214,000) means that a $4,000 bonus on top of a weekly cheque would be 58.75%. An $8,000 bonus would also have the same rate (58.75% in Quebec) with 26 pay periods.

I assume you understand that the total taxes assessed will be the same whether 0% or 54% tax is withheld. Your complaint is the government is taking too much withholding tax up front that the taxpayer could put to better use rather then wait for it to be refunded back.

There are mechanisms to request less tax be withheld if for example you will be putting a large amount in an RRSP or have other large deductions to offset.

ml88888888 wrote: ↑ Just file your tax right away when CRA opens up to accept 2020 tax return, usually around Feb, assuming you are getting a refund. Don't argue or loose sleep over about 2 months of worth of investment income you could have earned by investing the lower withholding tax you could have(i.e. no free loan to the gov't for 2 months). How much you would loose with the so called free loan to the gov't? Let me see if you can earn 2% per year interest if you put that money into a high interest saving acct for 2 months, $30k bonus x 50% tax = $15K. 2% of $15k = $300 per year. 2 months of $300=$75. $75 is taxable @ 40%. You will miss $45 you could have earned.

That's not the issue (what I could have earned with the money). Why should the government take $2,000 when it's only owed $500? That's $1500 more than it's entitled to. This is especially true when this occurs in Feb vs Dec.

It's just laziness, just like with CPP/EI. If you are fully paid up in June and switch employers, you have to pay the full $3500 again. Is this okay, even though you'll get it back in April? What if you wanted to use that money to buy a car or take a vacation? It's your money, not the government's.

DaveTheDude wrote: ↑ I assume you understand that the total taxes assessed will be the same whether 0% or 54% tax is withheld. Your complaint is the government is taking too much withholding tax up front that the taxpayer could put to better use rather then wait for it to be refunded back.

Exactly. Over-paying a little is okay. Over-paying a lot is not okay. See my comment below regarding how you pay CPP/EI twice when you change jobs once fully paid up. Sure you get it back, but this is pure laziness on the part of CRA. How about just not collecting is a second time? This would not happen in the UK. Probably not in the USA either.

The government is totally aghast at the prospect of taxpayers actually owning them $$$ at tax time.

Can you say CERB???

taxrage wrote: ↑ Exactly. Over-paying a little is okay. Over-paying a lot is not okay. See my comment below regarding how you pay CPP/EI twice when you change jobs once fully paid up. Sure you get it back, but this is pure laziness on the part of CRA. How about just not collecting is a second time? This would not happen in the UK. Probably not in the USA either.

The government is totally aghast at the prospect of taxpayers actually owning them $$$ at tax time.

Can you say CERB???

Is it an CRA issue or an issue with payroll? Besides, if one is paid up for things like CPP and EI in June, and they get a new job, they can increase their non-refundable tax credit so that less tax is withheld. While still paying CPP and EI, taxes owing would be cancelled out by CPP and EI overpayments.