High Tax Rate On Overtime

by Tax Guy - Burlington Accountant on August 21, 2009 Print This Post Print This Post

A reader of Canadian Tax Resource asked me recently about why their overtime was taxed at nearly 40% when their regular pay was taxed at about 24%.

My regular bi-weekly pay is $3,000 and normally my employer deducts 23.9% or $717 from every pay.

Recently, I worked some overtime and on my last pay I got an extra $1,000 so my total gross pay was not $4,000. However, my employer took a total of $1,117 from my pay. Essentially, I had to pay $400 of extra tax on $1,000 of overtime. That’s 40%!

There are a couple of things to consider before we dive into how a $1,000 of overtime can be taxed at 40%.

Progressive Taxes

Canada’s tax system is progressive. This means that you pay increasing rates of tax as your pay increases. For example, a resident of Ontario would pay 21.05% on the first $36,868, 24.15% on the next $3,878, 31.15% on the next $24,158 and so forth.

Marginal Tax Versus Average Tax

At $3,000 bi-weekly, you would be making $78,000 per year. The basic tax on $78,000 is about $18,650 or 24%. This is the amount of tax your paid on $78,000 and is called your average tax rate.

The marginal tax rate is the rate of tax you paid on the last dollar you earned. At $78,000 you would be at the one of the top tax brackets and would pay 39.41% on the next $3,450 dollars you earn. After that you will pay 43.41%.


If you make $78,000 per year and will pay 39.41% of tax on each additional dollar earned, a $1,000 of overtime would mean you pay almost $400 of additional tax.

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

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{ 1 comment }

Tracaitim August 21, 2009 at 9:06 am

The real answer, “You’ve just experienced what it’s like to be taxed like the rich . . . now stop complaining about taxes being skewed to tax the poor.”

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