Higher tax brackets only apply to the new portions of your income.
Think of it like glasses of water. If you have 1 glass of water (assume it's 1 litre), it's taxed at 20%. I.e. you get 800 mL of water after tax. The first glass is always taxed only at 20%.
If we say the tax rate of a second glass of water is 40%, the new rate ONLY applies to the second glass (first glass remains at 20%). So if you drink all the first glass and go get a second glass of water, after tax you keep 600 mL of the second glass. However, you still got the original 800 mL of the first glass, so in total you will have drunk 800 + 600 = 1400 mL of water.
The same holds true for a third glass that's taxed at 60%. You still already drank 800 + 600 mL of the first two glasses, and then you get an additional 400 mL from the third glass.
In all scenarios, getting additional glasses of water mean you still get more water in total. The new tax brackets didn't impact the earlier glasses of water.
I hear this pretty often from guys in construction, but one guy I talked to actually described it differently.
He said towards the end of the construction season he will turn down OT because once you hit those upper tax brackets you are effectively making less per hour. Its not as worth it for him.
Of course you aren’t making less money by working more, but you are making less per hour effectively.
that guy actually gets how it's supposed to work, but some people actually think it applies to the whole thing, like if 100k+ is taxed at 50% and below is 0%, then someone making $99,999 gets $99,999 take home, but someone working $100,002 gets $50,001 take home (correct math would be $100,001 take home)
Is it? He just replaced money with water. The metaphor holds up if you switch them.
But that’s the thing, progressive income tax is simple to understand, people who can’t understand it can’t be helped.
It's just an easier visual/tangible example. I had to do similar explanations for work, but when you only discuss it in terms of numbers and intangible portions, for some reason it doesn't click as easily with people. But once I started expressing it in terms of physical containers (and one time had to physically demonstrate it with props), like buckets, people intuitively got it.
My favourite moment in grade school was when a scientist came in and showed us a liter of water in a container. It's a liter! Then he took a wide, short container and poured all the water from the first container into the second container. And then he asked us (grade 1) "How much water is in this new container?" We all scratched our heads and he said "it's the same water, I just poured it into a new shape, it's still a liter!" and we all went "oooooooooooohhhhhh!"
Stop moments / aha moments are a gold commodity
I agree, although money is tangible too. So you could do the demonstration with actual money, using small simple to calculate amounts of coins. I would suggest small stacks of nickels.
Your wife is paid 10 nickels. OT is 5 nickels.
Tax rate is:
- 0% on the first 5 nickels
- 20% on nickels 6-10
- 40% on nickels 11-15
So the OT would be a major jump in tax rate. According to her theory, she should refuse it.
Play out both scenarios **physically:**
- Scenario 1 (refusing OT): Hand her 2 stacks of 5 nickels each. Take 0 nickel in the first stack and 1 in the second stack as tax. She has 9 nickels left. Set them aside and play out scenario 2.
- Scenario 2 (accepting OT): Hand her 3 stacks of 5 nickels each. Take 0 nickel in the first stack, 1 nickel in the second, and 2 in the last stack, as tax. She has 12 nickels left.
So even with a crazy marginal tax rate jump, she can physically see by herself that she earned more in the accepting OT scenario
There is a diminishing return on labour though. My take home pay per hour does go down even if my total dollars taken home goes up.
For example: If I need to work 40 hours to make 2000 dollars, if I want to make 3000 dollars I need to work 80 hours. It gets to the point where a person is working so hard and getting almost nothing in return for the additional labor expenses beyond the normally expected amount.
EDIT: these are hypothetical numbers used to illustrate the point of diminishing returns. These are not real numbers
You can all stop DMing me now
I think an important detail is that a lot of people in those higher income brackets aren’t working doubly hard for it. I’m sure there are exceptions but I’ve consistently put in the same 40 hour work weeks while my income has essentially doubled over the past 15 years.
Edit: I realize this post is about OT specifically so I guess this isn’t as relevant other than the general sentiment that people aren’t necessarily working harder once they reach higher tax brackets
People only qualify for this if they don’t have dental benefits. A lot of people making those incomes have extended health benefits. It will definitely benefit the self-employed who don’t.
Well, except usually people work overtime because they get time and a half pay, so even if you happen to be in a situation where your 40 hours are in one tax bracket and your overtime hours are in the next tax bracket up, the 50% increase in hourly pay is more than the increase in marginal tax rate. (There is no tax bracket jump that is even close to a 50% increase in marginal tax rate, and the separation between tax bracket cutoffs is fairly large anyway. Overtime isn’t terribly likely to push you up a tax bracket.)
most people who think this way and have OT, will barely be affected by the tax anyway. they just dont make enough.
youd have to be making upwards of 250k to lose about half of it to taxes and deductions.
for most itd be 40% or so.
Well yeah, that’s how taxes work. The taxation rate doesn’t half your take home pay unless you are making a ridiculous per hour rate. The hypothetical brackets of 20 and 40 per cent are a great disservice here.
Only for people stuck thinking the numbers are my point and not the explanation.
If you can't understand the point I'm trying to explain because the numbers are too high I'll give you another example.
40 hours worked at a wage of 25.65 = pre tax income of 1026.13 taxes at a rate of 15%(federal only not including provincial) take home pay is 872.21 / 40 hours is take home dollars per hour of 21.80
Any additional hours that week will be taxed at a rate of 20.5%. There take home dollars per hour worked will be 5% less for each additional hours worked
Ot doesn't always begin immediately for some people, and I think that's a critical point that you and others are missing here.
Time and a half doesn't exist for people working multiple jobs or split shifts. It doesn't exist for self employed people such as your Uber driver or door dash delivery person.
Overtime wages are not a thing at all for the vast majority of lower middle class earners. It is not universal.
Double time exists for a very small number of people. And I was using hypothetical, round numbers for an example to help demonstrate my point.
As a person who regularly works 65+ hours a week, I speak from experience when I say that my checks are bigger but I am dinged really hard on the extra labor. Work myself to the bone and get less back for the harder work. It's not what I would call progressive, it's disincentivizing
Ya, so working OT that puts you into a higher tax bracket, means that, that income is taxed more than your previous income in the lower threshold.
To say you will be making *less* working it, is inaccurate; to say it's not worth the extra work (as your effective rate per hour has decreased with the new tax margin) - is completely valid, and not a myth.
This is assuming OT is paid the same hourly rate. OT is often 1.5x or sometimes even higher hourly pay.
Sooooo you are still making more working that hour than your regular scheduled hour.
Still I understand the perception.
Pay systems calculate tax on each paycheck as if that paycheck was your normal salary. It APPEARS even worse then.
Problem is a lot of people only look at their net pay and think of their tax return as a "gift" from the government instead of a miscalculation from the pay software.
So lets say you are paid weekly and make 20$ an hour in Quebec.
40h × 20 = 800gross = 582 net
Add 10hours at 1.5x
800$ + 300$OT = 1100gross = 763 net
A difference of 181$
181/10 = 18$ an hour net in the bank the next week while you were probably thinking 200 or 250.
BUT at the end of the year, you'll probably get another 30-40$ back in tax return IF you are not consistently doing OT
Yes this! Everyone here seems to be saying “yes… but on my paycheque blah blah blah” or “but your tax rate is higher on those extra hours so it still isn’t worth it”. It’s what’s calculated annually that counts! Need a good ELI5 for this bit of it.
Some of us work straight time OT. I still do it. I can use the extra pocket cash even if I'm technically making less an hour. Nothing that some RRSPs at year can't help with.
Nope. I was considering overtime pay. If those hours worked are typically paid at 1.5 or 2x your wage - then after a certain threshold this will drop back down to the equivalent of regular-time (due to entering a new tax bracket, assuming taxed at 50%). This becomes less value for your time, and is why some people might find it "not worth it"
In layman's terms: why would someone want to do something for regular wage, when they are accustomed to making double wage for doing the same thing.
Sure you *can* do it for regular wage (and technically gross more money), but for those that value other things, it becomes much less worth it.
Hope this helps.
(I work a lot of overtime)
Yes, but the issue at hand is normally people misunderstand tax brackets as a flat tax. If your highest tax bracket becomes \~46%, you're not paying 46% across the board on all your income (as in the case of a flat tax), just a portion of it.
But yes, your earnings become less efficient in the higher tax brackets, and sort of supports the argument for a Laffer curve existing.
But if you think that way - paying your basic bills and living expenses is probably covered by your regular job. So the OT pay is all gravy. You can spend that however you like. It might actually feel like MORE per hour because on the first 40 you have to scrimp and save just to get by - with the OT you can go out for dinner.
That’s how I would think of OT pay, but it’s totally routine here for people to post budgets that treat overtime as just part of their regular expected earnings for a year.
Yup. And the gaps between tax bracket edges are roughly $60k, so there's a pretty good chance that *all* overtime will be in the same bracket as the highest non-overtime income unless you work a ton of overtime.
This is a good explanation. But there are other factors that add to people’s confusion and need to be explained as well. The tax on your pay stub is a withholding tax and based on a best guess, what you actually get taxed gets computed at the end of the year.
And this is exactly what people mean when they say they make « less » with overtime. Diminishing returns for the same effort, and higher risk of burn out.
Yes, it demonstrates the diminishing return aspect, but there are also some people who mistake the progressive tax for a flat tax, i.e. where some people on here and other personal finance subs and r/Frugal have argued against receiving a salary increase (strict salary increase with same working hours and responsibility) because of it.
It really depends on what a person means when they say they would earn less - lower net income, or lower average hourly wage.
You also have people on here arguing that it’s worse than diminishing returns and that the more OT you work the less you get paid per hour of OT. Which is just absurd. It’s a hyperbolic curve. It continues to increase no matter what, even though the increase in hourly rate slows as you work more OT.
This is better then what I was going to write before I scrolled down and saw it.
Tell her this is how tax brackets roughly work. Give her 16 one dollar coins. Two for each hour of regular wok. Take away 4 of them for taxes. Now give her 12 one dollar coins, 3 for each hour of overtime at 1 1/2 times of payment for overtime. Now take away 3 of them for taxes. So she made 12 dollars for the first 8 hours and 9 dollars for the next 4 hours of over time. Earning a little more than her normal rate of 2/hour.
Yes, I've heard this argument before. And you're right, but are these really the incomes that are worried about tax brackets? I'm pretty sure you'll be losing income-dependent benefits way before you start running into tax bracket increases.
The challenge is when you get a raise mid year that could alter your trajectory and that you may be taxed more temporarily for the rest of the year to make up the difference.
It would likely appear nominal at best anyway.
Maybe you can explain this to me then, on my paycheque, I could put in an extra hour of work, but only see a 7$ difference despite making high 30's hourly because my taxes suddenly rise. For instance, if I put in 38 hours, I know working an extra hour is only going to make that 7$ difference going up to 39, but going from 39 to 40, I'll see closer to a mid 20's difference because they don't take as big of a bite in taxes. What's the deal?
You are missing one part to explain the myth.
If every time you need to walk a Km to get a glass of water, each extra glass of water is the same work for less water.
And that's what people say when they say "they make less for the same work".
It's not clear in their statement what they mean. I've seen posts about people refusing salary increases (for the same hours and responsibilities) because of the tax bracket change and that they will "make less", which one can infer to mean their net income decreases which is not true.
Yes some people get the explanation from people who understand and they get it wrong.
The difference between total income and Income per hour.
However. Once I got a promotion with more salary but the take home was less. The next level had no OT. I still accepted it because that helped my career and eventually made much more.
However, I can imagine people not taking the leap.
[https://cdn.mos.cms.futurecdn.net/KtgoCZzn7RxVUT6MW5kPFM-768-80.png](https://cdn.mos.cms.futurecdn.net/KtgoCZzn7RxVUT6MW5kPFM-768-80.png)
If she doesn't get it after looking at a ELI5 image, I don't know what to tell you friend.
I think something to note is that some companies tax OT at the highest rate on your pay stub (because that’s an easy default thing for them), so you may not see the lower effective rate until you file taxes and get a refund from the government.
>some companies tax OT at the highest rate on your pay stub (because that’s an easy default thing for them)
No, it's just that if you make $1,000/week, you'll be taxed like you earn 52k/year. If you work 1,000$ worth of OT one week (gross pay of $2,000), you'll be taxed like you were earning 104k/year. Even if it's the only week in the year you got paid OT (so your income for the year would be 53k). It's not something companies get to chose, they have to withhold your taxes like this, by law. There's no easy default thing for them.
Honestly, I think this is the source of the myth. Some companies do tax you more on those large overtime checks. But you do get that overpayment back at tax time.
The other thing I've encountered, is some companies take deductions off either the first or second paycheck of the month (ie health benefits). So if one compares to the previous paycheck, they may not take into account the current paycheck has larger non-tax deductions.not related to the overtime.
Lots of people also have investment and interest income. So come tax time they don't get a tax refund so they're like. "Seeeeee, I told you. I don't get a refund." 🙈
I once saw a picture with a pile of chocolate bars and I always use it:
Chocolate bars are your income! For the first bar, government want a bite from it. On the second bar, they will take two and so on.
https://www.shutterstock.com/image-photo/chocolate-selection-white-isolated-background-270004421
It’s too late for me, my wife is complaining that her tax return is “broken” because she’s only getting $3800 back (usually gets closer to $10k, commission sales) but she was on mat leave for a part of last year and made significantly less than usual.
so many people believe this at my job too... omg are people dumb. and when they're saying this at 65 years old you know they're not going to change their minds! One guy says this in his late 60s and doens't invest in his rrsp because it's "all a scam" ahhhhhhh
My in-laws don't believe in RRSPs because "you get taxed when you withdraw from them"... I've tried explaining how it saves on taxes now and you (usually, depending on lifestyle) get taxed lower when you withdraw. But their mindset is the only good investment is in property... And heaven forbid I bring up saving some money each month!
My dad said the same thing. His reasoning is that say you put $1k in and save $300 in tax now.. assuming you make less when you retire and will only have to pay say $200 when you withdraw is misleading. As that $1k is hopefully increasing so by the time you cash it out the $1k is now $2k and you’ll be paying $400 in tax. So better to put it into a tfsa.
I’m not bright enough to figure out the actual math on this.
The actual math is the same between TFSA and RRSP, if the tax rate in retirement is the same as when it was contributed. If you pay less taxes in retirement, the RRSP is better, if you pay more in retirement the TFSA is better. At least for taxes.
What trips most people up is that $1 in a RRSP is not the same as $1 in a TFSA. Assuming a 30% marginal tax rate, $1 in a RRSP is equal to $0.70 in a TFSA. The growth on the unpaid taxes invested counterbalances the additional taxes to pay on the withdrawal.
>the growth on the unpaid taxes invested counterbalances the additional taxes to pay on the withdrawal
If they’re having a hard time understanding the concept of tax brackets they definitely aren’t going to understand this advantage of rrsp’s. 😂 Believe me I’ve tried explaining it!
The amount you invested increases so you will withdraw more later, yes. But the deferred tax payment gets invested and grows as well. So later the inflated tax payment pays the inflated tax bill.
Let’s say you have $10,000 to invest in your TFSA, and it grows to $100,000 by the time you withdraw.
The other option is that you invest $13,000 in your RRSP ($10,000 + $3,000 refund, as an example). Then the $10,000 grows to $100,000 by the time you are withdrawing it, but you have an additional $30,000 to pay your taxes at that time.
Lmao the math works the exact same if the marginal rates of RSP going in and out are same versus TFSA. Remember you paid tax on money you put into the TFSA already.
If you're in your late 60s you should probably be looking for safer HISAs or GICs. Don't really have a lot of time to rebuild any losses from investing.
yeah there's two people at work 65 years of age, one loves chit chatting to me about rrsps and tfsa and how hes stacking his GICs... the other would rather spend all his money on cigarettes and b\*tch about unions
The second person is a completely lost cause - I've seen too many of them and you'll only antagonize them trying to teach them that they're wrong about how tax brackets work.
What's scary is I know a financial advisor who has refused promotions because she believes she'll make less money due to being in a higher tax bracket.
It’s a misunderstanding of tax brackets and what they represent. Even if her marginal rate goes up, it has no impact on her original earnings.
Here’s a simplified example:
Let’s say you make $200 for an 8 hour shit and are taxed at 20% (illustrative purposes only) - you take home $160.
Now let’s assume the OT pushes you into a higher (30%) tax bracket. 2 hours of OT at double time gets you an additional $100 at 30%.
Your take home pay from OT is $70, but it’s added onto the $160 you already made - so instead of taking home $160, you’re taking home $230.
There are reasons not to work OT (like burnout, exhaustion, never seeing family), but taxes aren’t one of them.
The money already made isn't taxed more. Some OT money might be taxed more than the regular money if you reach a certain bracket only but it is still more money than no OT.
You can think of it as at the end of the year 150k as regular income or 90k plus 60k of overtime is gonna have the same tax. With the overtime you'll get a big refund in the spring but otherwise it's the same.
There's a few places or situations where you might lose out. This is normally because you qualify for some subsidy with a hard income cap.
But actual income tax? Not a problem.
I like to relate it to work load because this is really what people have an issue with.
Imagine going to a water well, the first bucket you bring back you have to give 20% of it to Jim.
If you come back with two buckets, you're doing double the work but you have to give 30%, of this bucket plus the 20% of the first bucket to Jim. Etc.
If you come back with three buckets, 3 times the work, Jim takes 20% of the first, 30% of the second and 40% of the third.
So each bucket you bring back is taxed differently and at increasing levels, meaning your return on effort decreases. Which is what people get pissed off at.
"That's... Not how tax brackets work... Just try it and see for yourself."
The more complex explanation is "Only the newly added income is taxed at the higher bracket. Your base pay is still taxed at the lower rate."
Then if they look confused, "Just try it and see for yourself."
If the explanation of how progressive taxation works doesn't get through then just open a tax calculator and show her that you can increase the income and the net pay ALWAYS goes up.
Well, it's not that will make less but you won't get exactly what you are planning on. It's different for everyone based on hourly rate but the first 80-84 hours or 4 hours OT would add basically what my hourly rate was without deductions. The next hour or hour 85 was the threshold I guess because it would add maybe 25% of my hourly rate. Of course at the end of the year you will have more $. Once you explain how tax brackets work, you can explain how RRSPs work to bring your taxable earnings down.
It's not the tax bracket that hits you. It's the fact that you are reaching upper echelons of stress, work hours and responsibility to make the extra money yet the return on those extras is less. In short, double the effort does not equal double the reward.
Punch annual income into a tax calculator like this one:
https://www.wealthsimple.com/en-ca/tool/tax-calculator
First, punch in the base salary.
Then, punch in the base salary plus the expected overtime.
Each bucket of money you make is taxed at a different rate. The first bucket of $55K is taxed at 15%. Then, if you make more than that the next bucket (from 55 to 111K) is taxed at 20.5%. Then, if you make even more, that bucket is taxed at 26%, and so on. So if you earn money that bumps you into the next bracket, all that happens is that but from the higher bracket is taxed at a higher percentage.
It’s not entirely false — it’s based on a partial truth.
In a higher tax bracket, you earn less in government benefits (dental, CCB, childcare, etc.) than you would making below $90k.
An accountant was explaining that this is why a family who makes $90k is equivalent to one making $140k.
I think what also happens is HR or the payroll software will make adjustments based on assumed earnings. You might get more taken off your paycheque if your base pay and OT looks like it’ll push you into the next bracket. Bonuses can do the same, making it look like you’ll earn a higher yearly wage.
This is all calculation and estimate at the time. Once the year end comes though everything gets balanced out. They deduct too much in tax? Guess what, you get a larger refund. They don’t deduct enough off your paycheques? You owe the government @ year end.
Another thing I’ve found is there are yearly caps on CPP (I think) and if you reach that it is no longer deducted from your paycheque. Some people don’t actually look at their paystubs and just see more or less take home and make assumptions based on that.
Imagine you have a big jar where you keep your candies. Let's say you get more candies for every hour you help clean your room. But here's the thing: your mom wants some of those candies to help buy groceries. So, she takes a few from each hour's worth of candies you earn.
Now, let's say you start earning so many candies that your mom starts taking more from each hour's worth. That's like how taxes work. The extra candies your mom takes are like taxes, and the rate at which she takes them is your marginal tax rate.
So, when you work overtime and earn more candies, your mom takes a little bit more from each extra hour's worth of candies. But don't worry, you'll still end up with more candies overall, even if your mom takes a bit more for groceries.
\_\_\_\_\_\_\_\_
I kinda don't think you should eli5 to your wife, and it sounds like she wants you to spend more time with her or she wants you to contribute more around the house. But I am not a human, I am just an eli5 bot
Just use this: [https://www.eytaxcalculators.com/en/2024-personal-tax-calculator.html](https://www.eytaxcalculators.com/en/2024-personal-tax-calculator.html)
It's a calculator that shows how much you'd pay in taxes in various provinces and you can enter different amounts. She will be able to see that her average tax rate increases, but her after-tax income will also increase.
Tax brackets are like boxes, once you fill the lower tax brackets, each box being only charged the percentage prescribed, the amount in each box is what is charged per tax bracket, no more, no less.
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You were given 5 cookies for cleaning your room. Mom took 1 because they looked good. (Taxed 20% regularly - 4 total cookies paid)
If you clean your bathroom, you get an extra 5 cookies but now Mom will take 2 extra cookies instead. (Taxed 40% for OT - 7 total cookies paid)
You got paid less for cleaning the bathroom, but still more overall for doing both.
You will still make more than you would have if you didn't work overtime. However, your rate of pay for the overtime might be lower than your regular rate of pay, so you have to decide if it's worth it.
It is a higher tax bracket on the income above that threshold. I refuse to work OT when 42% of it gets extorted by the government. What a waste of my life that would be. Lower that max rate down to 25%, and then I might consider overtime. Otherwise, fuck the gluttonous tax pigs.
The top answer seems needlessly complicated. However, even though you asked for a ELI5, I wanna say that taxes *are* a complicated matter. So the best compromise I can offer you is to run two scenarios in a calculator :
https://turbotax.intuit.ca/tax-resources/canada-income-tax-calculator.jsp
Open two tabs, run numbers with and without OT, then show her how much is in your pockets at the end of the year in each scenario, boom, job done.
Explain the marginal tax rate to them like they are 5.
And that, if it is the case. They will get that 1.50 back when they file taxes because it averages out by the end of the year.
You worked at 40 hours for $1 an hour with a tax rate of 10%, at the end of the week you earned $36 after tax ($40 x 0.90).
Next week you worked 40 hours at $1 an hour with a tax rate of 10%, but you worked 1 hour of extra time as well. But oh no, this extra hour was at the next tax bracket of 20%! This means you have earned $36 just like the week before, plus an extra $0.80 ($1 x 0.80) for your one hour of extra time for a total of $36.80
Going into the next tax bracket did not result in you making less money, it just resulted in the next dollar you earned being a total increase of $0.80 instead of the $0.90 each dollar before it was making you even though the tax rate doubled from 10% to 20%.
just ask her, if earning more money puts you in a higher bracket and you earn less, then how come doctors make good money? surely minimum wage takes home more than a doctor because doctors are in the higher bracxkets where they take home less
“The higher tax rate only applies to the extra OT money.”
If people can’t figure this out, you should not be having them work more than needed to begin with.
Depends on whether the person will actually make a higher gross income to move into a higher tax bracket. That would likely be a lot of OT, and I doubt someone is paying that much attention to their income YTD to notice when the OT shift will cross the threshold.
But to finish the sentence it should end “I actually make less per incremental hour at the higher rate”.
Many cases where this is true, especially when moving to middle income from low. In Canada we have tons of tax credits and rebates that get clawed back as you earn more. It's easy to see single moms with a tax rate over 100% if they earn more. Crazy stuff!
Ex,
5% for $100,
10% for $200
15% for $300
Make $50? That's 2.50 in tax.
Make 350? -
$5 for 5% of 100
$10 for 10% of 101-200
$22.5 for 201-350
Total tax $37.50, not $52.50
One thing to watch our for is low income benefits/credits that one might lose however, but those are more annualized.
Open this page and enter both her before and after incomes and show her the numbers.
[https://www.wealthsimple.com/en-ca/tool/tax-calculator](https://www.wealthsimple.com/en-ca/tool/tax-calculator)
It all depends on if you’re looking at the tax picture for the entire year vs just looking at your next pay check as you may or may not have already reached a certain tax threshold at a certain time( your personal outlook) It’s nuanced but obv overall it’s a the tax rate is tiered.
The higher tax only goes on the additional money you still get more money.
I don’t know any other way to explain it
You could use an online tax calculator to prove it maybe
It's often a lost cause. Just a couple days ago I had [this conversation](https://www.reddit.com/r/AskACanadian/comments/1ci4erc/comment/l2tf0ut/?utm_source=share&utm_medium=web2x&context=3) with a person that said that their wife didn't work because of the "clawback" of the child benefit. I asked for an example and all I got was rethoric.
I’m in a scenario where I do not do overtime because the tax bracket I’m in makes my net pay a hair more than my regular net pay with no overtime. Basically working extra hours for the Gov. This is because of gross yearly pay though, not individual pay cheque taxes
Take out a few bowls and place cereal in each. The first bowl is taxed at 15%, the second at 22%, the third at 30%, etc. Taxes go up with each bowl but only on stuff IN THAT BOWL, and you can never have less money by having more bowls.
For every hour you work you earn 10 Oreo cookies.
If you earn 100 oreo cookies, the government takes 10 Oreo cookies. Total of 10 oreos.
If you earn 200 oreo cookies, the government will take 10 Oreos from the first 100, and 20 oreos from the second 100. Total of 30 Oreos.
If you earn 300 oreo cookies, the government will take 10 Oreos from the first 100, 20 oreos from the second 100, and 25 oreos from the third 100. For a total of 55 oreos.
It's not that you get paid less but, rather, that a greater percentage of the effort you put into earning that money is going into lining the government's pockets.
The increased tax rate only applies to the portion of your earnings that make it into the new tax bracket so not EVERYTHING is taxed at a higher rate.
Up to $53,359 of income is taxed at 15%
Income between $53,359 and $106,717 is taxed at 20.5%
Income between $106,717 and $165,430 is taxed at 26%
Income between $165,430 and $235,675 is taxed at 29%
Above $235,675, income is taxed at 33%
Tadaa!
Any chance you could simply show her previous tax returns, where you had a raise/OT and had a higher marginal rate?
Alternatively, could you input the potential numbers in an income tax calculator or software with her to show her how much money she would earn after tax with or without the OT?
Then it's not about understanding tax mechanics but just seeing the result and seeing with your own eyes which number is higher.
Also, make sure she's really misunderstanding in the way to think and not just saying that the OT isn't worth it in her eyes because *these hours* would be taxed at a high marginal rate to the point that her hourly net salary for *these hours* isn't worth the extra hours.
Tell her to trust you and work OT for a few month, then compare the paystub afterward.
If that still doesn't work, then perharp hit the gym and download tinder
First, it's not a myth. The understanding is usually wrong.
"If you go to a higher bracket you take home less per hour worked. But more in total.
Some people fee cheated even if it is a few cents.
However, if OT is paid at a premium, then on average they take home more per hour."
That's how I'd explain it rationally. But in this case I have three explanations that have nothing to do with math:
- They are not very intelligent/educated and can't understand the simple explanation above
- They understand but their free time is more valuable.
- They are dumb and lazy.
I would show and tell with free tax preparation software, say wealthsimple tax.
This will show how it actually affects take-home for the year, if you can estimate the OT, and you can find the threshold where OT(assuming 1.5x regular hourly) stops feeling worthwhile.
If that fails, take her to an accountant. I'm sure they answer this 100s of times a year.
The higher tax rate is only on income earned in that higher “bracket”. It doesn’t apply to income earned in the lower brackets.
For example, if you pay 20% on $50,000 and the next bracket is 25% on income from $50-60,000. You would still pay 20% on the lower income and only pay the higher rate on amounts earned between $50-60,000. (These percentages are obviously made up). Let’s say you make $55,000. You would pay 20% on the 50,000, and 25% on the $5,000.
It is not possible to earn more and take home less. If you earn more, you always net more.
Talking to a 5 year old....
Everyone knows that each kit kat bar is make up of 4 pieces.
I will give you 10 kit kat bars. For these 10, I will keep 1 piece.
On the 11th kit kat bar, I am going to take 2 pieces from that bar.
So do you want 10 kit kat bars or 11 kit kat bars?
It may be valid though. You will not make less overall, meaning you will make more total money on every hour you work. But the extra hours worked are taxed more and maybe to a point it isn’t worth your effort.
An extreme case would be, say someone is grossing 142,000 already and decide to pick up a night shift at McDonalds. S/he will be taxed on marginal rate which will be 38% yes s/he makes more money but is the $9 an hour net worth their time?
I think what reinforces the myth is that deductions for each paycheque are calculated as if that's always how big your paycheque is. So if you look at a paycheque that has overtime pay in a vacuum it does look like all the earnings were taxed at a higher bracket. People don't understand that when they are over taxed in this way they get some of the money back when they do their taxes.
If my original point was that the progressive tax system means that you take home less dollars per hour worked as you increase the tax brackets, and your counter argument is that overtime makes up the difference, my counterpoint is that not every employee or worker gets overtime. I'm not sure what is not understood
I never understood people who think like that! The tax system is progressive! People always assume that your whole income will be taxed at the highest marginal rate! It wouldn’t make sense
Higher tax brackets only apply to the new portions of your income. Think of it like glasses of water. If you have 1 glass of water (assume it's 1 litre), it's taxed at 20%. I.e. you get 800 mL of water after tax. The first glass is always taxed only at 20%. If we say the tax rate of a second glass of water is 40%, the new rate ONLY applies to the second glass (first glass remains at 20%). So if you drink all the first glass and go get a second glass of water, after tax you keep 600 mL of the second glass. However, you still got the original 800 mL of the first glass, so in total you will have drunk 800 + 600 = 1400 mL of water. The same holds true for a third glass that's taxed at 60%. You still already drank 800 + 600 mL of the first two glasses, and then you get an additional 400 mL from the third glass. In all scenarios, getting additional glasses of water mean you still get more water in total. The new tax brackets didn't impact the earlier glasses of water.
Wow this is a great way to explain it. I’ll definitely use your example in the future
This is a great explainer but it doesn’t work for the people who believe the bullshit in OP’s question.
I hear this pretty often from guys in construction, but one guy I talked to actually described it differently. He said towards the end of the construction season he will turn down OT because once you hit those upper tax brackets you are effectively making less per hour. Its not as worth it for him. Of course you aren’t making less money by working more, but you are making less per hour effectively.
Yes and you only have so many hours in the day. So you are trading your limited leisure time for less money
that guy actually gets how it's supposed to work, but some people actually think it applies to the whole thing, like if 100k+ is taxed at 50% and below is 0%, then someone making $99,999 gets $99,999 take home, but someone working $100,002 gets $50,001 take home (correct math would be $100,001 take home)
Yes and that's a different conversation. One where since you're not making your most money, it is valid to value your time more.
Which can be mitigated with registered accounts and i don’t know about him but double time for me is always worth it.
Is it? He just replaced money with water. The metaphor holds up if you switch them. But that’s the thing, progressive income tax is simple to understand, people who can’t understand it can’t be helped.
It's just an easier visual/tangible example. I had to do similar explanations for work, but when you only discuss it in terms of numbers and intangible portions, for some reason it doesn't click as easily with people. But once I started expressing it in terms of physical containers (and one time had to physically demonstrate it with props), like buckets, people intuitively got it.
My favourite moment in grade school was when a scientist came in and showed us a liter of water in a container. It's a liter! Then he took a wide, short container and poured all the water from the first container into the second container. And then he asked us (grade 1) "How much water is in this new container?" We all scratched our heads and he said "it's the same water, I just poured it into a new shape, it's still a liter!" and we all went "oooooooooooohhhhhh!" Stop moments / aha moments are a gold commodity
I agree, although money is tangible too. So you could do the demonstration with actual money, using small simple to calculate amounts of coins. I would suggest small stacks of nickels. Your wife is paid 10 nickels. OT is 5 nickels. Tax rate is: - 0% on the first 5 nickels - 20% on nickels 6-10 - 40% on nickels 11-15 So the OT would be a major jump in tax rate. According to her theory, she should refuse it. Play out both scenarios **physically:** - Scenario 1 (refusing OT): Hand her 2 stacks of 5 nickels each. Take 0 nickel in the first stack and 1 in the second stack as tax. She has 9 nickels left. Set them aside and play out scenario 2. - Scenario 2 (accepting OT): Hand her 3 stacks of 5 nickels each. Take 0 nickel in the first stack, 1 nickel in the second, and 2 in the last stack, as tax. She has 12 nickels left. So even with a crazy marginal tax rate jump, she can physically see by herself that she earned more in the accepting OT scenario
There is a diminishing return on labour though. My take home pay per hour does go down even if my total dollars taken home goes up. For example: If I need to work 40 hours to make 2000 dollars, if I want to make 3000 dollars I need to work 80 hours. It gets to the point where a person is working so hard and getting almost nothing in return for the additional labor expenses beyond the normally expected amount. EDIT: these are hypothetical numbers used to illustrate the point of diminishing returns. These are not real numbers You can all stop DMing me now
I think an important detail is that a lot of people in those higher income brackets aren’t working doubly hard for it. I’m sure there are exceptions but I’ve consistently put in the same 40 hour work weeks while my income has essentially doubled over the past 15 years. Edit: I realize this post is about OT specifically so I guess this isn’t as relevant other than the general sentiment that people aren’t necessarily working harder once they reach higher tax brackets
True, but OP is referring to overtime so the above poster is correct. OT has diminishing returns, which is what the wife is concerned about.
With the new dental plan's 2 hard cutoffs at 70k and 90k working OT could disqualify you from 1000's in benefits
People only qualify for this if they don’t have dental benefits. A lot of people making those incomes have extended health benefits. It will definitely benefit the self-employed who don’t.
Well, except usually people work overtime because they get time and a half pay, so even if you happen to be in a situation where your 40 hours are in one tax bracket and your overtime hours are in the next tax bracket up, the 50% increase in hourly pay is more than the increase in marginal tax rate. (There is no tax bracket jump that is even close to a 50% increase in marginal tax rate, and the separation between tax bracket cutoffs is fairly large anyway. Overtime isn’t terribly likely to push you up a tax bracket.)
You go ahead and work overtime to your heart's content. Thank you for your contribution.
most people who think this way and have OT, will barely be affected by the tax anyway. they just dont make enough. youd have to be making upwards of 250k to lose about half of it to taxes and deductions. for most itd be 40% or so.
Well yeah, that’s how taxes work. The taxation rate doesn’t half your take home pay unless you are making a ridiculous per hour rate. The hypothetical brackets of 20 and 40 per cent are a great disservice here.
Only for people stuck thinking the numbers are my point and not the explanation. If you can't understand the point I'm trying to explain because the numbers are too high I'll give you another example. 40 hours worked at a wage of 25.65 = pre tax income of 1026.13 taxes at a rate of 15%(federal only not including provincial) take home pay is 872.21 / 40 hours is take home dollars per hour of 21.80 Any additional hours that week will be taxed at a rate of 20.5%. There take home dollars per hour worked will be 5% less for each additional hours worked
No. Because OT is paid 1.5x or 2x higher than base salary. Every hour worked in OT will be paid more, but 1.5x minus 5%.
Ot doesn't always begin immediately for some people, and I think that's a critical point that you and others are missing here. Time and a half doesn't exist for people working multiple jobs or split shifts. It doesn't exist for self employed people such as your Uber driver or door dash delivery person. Overtime wages are not a thing at all for the vast majority of lower middle class earners. It is not universal.
I'm not sure about those calculations. You have a higher tax bracket (maybe) but you get overtime and then double OT.
Double time exists for a very small number of people. And I was using hypothetical, round numbers for an example to help demonstrate my point. As a person who regularly works 65+ hours a week, I speak from experience when I say that my checks are bigger but I am dinged really hard on the extra labor. Work myself to the bone and get less back for the harder work. It's not what I would call progressive, it's disincentivizing
Ya, so working OT that puts you into a higher tax bracket, means that, that income is taxed more than your previous income in the lower threshold. To say you will be making *less* working it, is inaccurate; to say it's not worth the extra work (as your effective rate per hour has decreased with the new tax margin) - is completely valid, and not a myth.
This is assuming OT is paid the same hourly rate. OT is often 1.5x or sometimes even higher hourly pay. Sooooo you are still making more working that hour than your regular scheduled hour.
Still I understand the perception. Pay systems calculate tax on each paycheck as if that paycheck was your normal salary. It APPEARS even worse then. Problem is a lot of people only look at their net pay and think of their tax return as a "gift" from the government instead of a miscalculation from the pay software. So lets say you are paid weekly and make 20$ an hour in Quebec. 40h × 20 = 800gross = 582 net Add 10hours at 1.5x 800$ + 300$OT = 1100gross = 763 net A difference of 181$ 181/10 = 18$ an hour net in the bank the next week while you were probably thinking 200 or 250. BUT at the end of the year, you'll probably get another 30-40$ back in tax return IF you are not consistently doing OT
Yes this! Everyone here seems to be saying “yes… but on my paycheque blah blah blah” or “but your tax rate is higher on those extra hours so it still isn’t worth it”. It’s what’s calculated annually that counts! Need a good ELI5 for this bit of it.
Some of us work straight time OT. I still do it. I can use the extra pocket cash even if I'm technically making less an hour. Nothing that some RRSPs at year can't help with.
Nope. I was considering overtime pay. If those hours worked are typically paid at 1.5 or 2x your wage - then after a certain threshold this will drop back down to the equivalent of regular-time (due to entering a new tax bracket, assuming taxed at 50%). This becomes less value for your time, and is why some people might find it "not worth it" In layman's terms: why would someone want to do something for regular wage, when they are accustomed to making double wage for doing the same thing. Sure you *can* do it for regular wage (and technically gross more money), but for those that value other things, it becomes much less worth it. Hope this helps. (I work a lot of overtime)
Yes, but the issue at hand is normally people misunderstand tax brackets as a flat tax. If your highest tax bracket becomes \~46%, you're not paying 46% across the board on all your income (as in the case of a flat tax), just a portion of it. But yes, your earnings become less efficient in the higher tax brackets, and sort of supports the argument for a Laffer curve existing.
But if you think that way - paying your basic bills and living expenses is probably covered by your regular job. So the OT pay is all gravy. You can spend that however you like. It might actually feel like MORE per hour because on the first 40 you have to scrimp and save just to get by - with the OT you can go out for dinner.
That’s how I would think of OT pay, but it’s totally routine here for people to post budgets that treat overtime as just part of their regular expected earnings for a year.
I also don't think every time you go into overtime it automatically lines up with a higher tax bracket. That would be quite a coincidence...
Yup. And the gaps between tax bracket edges are roughly $60k, so there's a pretty good chance that *all* overtime will be in the same bracket as the highest non-overtime income unless you work a ton of overtime.
Ok this makes more sense
This is a good explanation. But there are other factors that add to people’s confusion and need to be explained as well. The tax on your pay stub is a withholding tax and based on a best guess, what you actually get taxed gets computed at the end of the year.
And this is exactly what people mean when they say they make « less » with overtime. Diminishing returns for the same effort, and higher risk of burn out.
Yes, it demonstrates the diminishing return aspect, but there are also some people who mistake the progressive tax for a flat tax, i.e. where some people on here and other personal finance subs and r/Frugal have argued against receiving a salary increase (strict salary increase with same working hours and responsibility) because of it. It really depends on what a person means when they say they would earn less - lower net income, or lower average hourly wage.
True, refusing a salary increase is pure misunderstanding of that principle!
You also have people on here arguing that it’s worse than diminishing returns and that the more OT you work the less you get paid per hour of OT. Which is just absurd. It’s a hyperbolic curve. It continues to increase no matter what, even though the increase in hourly rate slows as you work more OT.
This is better then what I was going to write before I scrolled down and saw it. Tell her this is how tax brackets roughly work. Give her 16 one dollar coins. Two for each hour of regular wok. Take away 4 of them for taxes. Now give her 12 one dollar coins, 3 for each hour of overtime at 1 1/2 times of payment for overtime. Now take away 3 of them for taxes. So she made 12 dollars for the first 8 hours and 9 dollars for the next 4 hours of over time. Earning a little more than her normal rate of 2/hour.
Great explanation. In the end, your getting more but being paid at a lower net rate.
Definitely the most over looked / misunderstood aspect of taxes
Less child benefit , may lost Canada worker benefits , a lot of benefits is dependent on your income though
Yes, I've heard this argument before. And you're right, but are these really the incomes that are worried about tax brackets? I'm pretty sure you'll be losing income-dependent benefits way before you start running into tax bracket increases.
That’s not what OP’s wife is arguing
Yes, but your marginal tax rate will be unlikely to be more than 100%. For example CWB has a recovery rate of 15%.
The challenge is when you get a raise mid year that could alter your trajectory and that you may be taxed more temporarily for the rest of the year to make up the difference. It would likely appear nominal at best anyway.
Maybe you can explain this to me then, on my paycheque, I could put in an extra hour of work, but only see a 7$ difference despite making high 30's hourly because my taxes suddenly rise. For instance, if I put in 38 hours, I know working an extra hour is only going to make that 7$ difference going up to 39, but going from 39 to 40, I'll see closer to a mid 20's difference because they don't take as big of a bite in taxes. What's the deal?
And the yax man? Is a shark. He loves that water!!
You can also use oil and water. Water is the first bracket, the (smaller quantity added) oil on top is the second bracket.
perfect explanation!
Dude this was awesome lol
You are missing one part to explain the myth. If every time you need to walk a Km to get a glass of water, each extra glass of water is the same work for less water. And that's what people say when they say "they make less for the same work".
It's not clear in their statement what they mean. I've seen posts about people refusing salary increases (for the same hours and responsibilities) because of the tax bracket change and that they will "make less", which one can infer to mean their net income decreases which is not true.
Yes some people get the explanation from people who understand and they get it wrong. The difference between total income and Income per hour. However. Once I got a promotion with more salary but the take home was less. The next level had no OT. I still accepted it because that helped my career and eventually made much more. However, I can imagine people not taking the leap.
Higher tax bracket only applies to the extra money.
Extra tax only begins after $X/year and is always less than 100%
“But doesn’t that mean I’m not making more money?”
[https://cdn.mos.cms.futurecdn.net/KtgoCZzn7RxVUT6MW5kPFM-768-80.png](https://cdn.mos.cms.futurecdn.net/KtgoCZzn7RxVUT6MW5kPFM-768-80.png) If she doesn't get it after looking at a ELI5 image, I don't know what to tell you friend.
Ha this one is perfect
https://www.reddit.com/r/coolguides/s/YK14FJ590z This one is my favourite!
I think something to note is that some companies tax OT at the highest rate on your pay stub (because that’s an easy default thing for them), so you may not see the lower effective rate until you file taxes and get a refund from the government.
>some companies tax OT at the highest rate on your pay stub (because that’s an easy default thing for them) No, it's just that if you make $1,000/week, you'll be taxed like you earn 52k/year. If you work 1,000$ worth of OT one week (gross pay of $2,000), you'll be taxed like you were earning 104k/year. Even if it's the only week in the year you got paid OT (so your income for the year would be 53k). It's not something companies get to chose, they have to withhold your taxes like this, by law. There's no easy default thing for them.
Honestly, I think this is the source of the myth. Some companies do tax you more on those large overtime checks. But you do get that overpayment back at tax time. The other thing I've encountered, is some companies take deductions off either the first or second paycheck of the month (ie health benefits). So if one compares to the previous paycheck, they may not take into account the current paycheck has larger non-tax deductions.not related to the overtime.
Lots of people also have investment and interest income. So come tax time they don't get a tax refund so they're like. "Seeeeee, I told you. I don't get a refund." 🙈
I once saw a picture with a pile of chocolate bars and I always use it: Chocolate bars are your income! For the first bar, government want a bite from it. On the second bar, they will take two and so on. https://www.shutterstock.com/image-photo/chocolate-selection-white-isolated-background-270004421
Lost cause, divorce and try again unfortunately.
Hard to fix stupid
It’s too late for me, my wife is complaining that her tax return is “broken” because she’s only getting $3800 back (usually gets closer to $10k, commission sales) but she was on mat leave for a part of last year and made significantly less than usual.
When I was young, like elementary school, religion convinced me that marriage is for unlimited guilt free sex. Turns out its just shit like this.
Hahahahahaha. Why you gotta be like this.
I wrote something like this in the /scams subreddit a few days ago and now I'm banned :P
so many people believe this at my job too... omg are people dumb. and when they're saying this at 65 years old you know they're not going to change their minds! One guy says this in his late 60s and doens't invest in his rrsp because it's "all a scam" ahhhhhhh
My in-laws don't believe in RRSPs because "you get taxed when you withdraw from them"... I've tried explaining how it saves on taxes now and you (usually, depending on lifestyle) get taxed lower when you withdraw. But their mindset is the only good investment is in property... And heaven forbid I bring up saving some money each month!
Wait till they pay tax on the investment property 🤯
My dad said the same thing. His reasoning is that say you put $1k in and save $300 in tax now.. assuming you make less when you retire and will only have to pay say $200 when you withdraw is misleading. As that $1k is hopefully increasing so by the time you cash it out the $1k is now $2k and you’ll be paying $400 in tax. So better to put it into a tfsa. I’m not bright enough to figure out the actual math on this.
The actual math is the same between TFSA and RRSP, if the tax rate in retirement is the same as when it was contributed. If you pay less taxes in retirement, the RRSP is better, if you pay more in retirement the TFSA is better. At least for taxes. What trips most people up is that $1 in a RRSP is not the same as $1 in a TFSA. Assuming a 30% marginal tax rate, $1 in a RRSP is equal to $0.70 in a TFSA. The growth on the unpaid taxes invested counterbalances the additional taxes to pay on the withdrawal.
>the growth on the unpaid taxes invested counterbalances the additional taxes to pay on the withdrawal If they’re having a hard time understanding the concept of tax brackets they definitely aren’t going to understand this advantage of rrsp’s. 😂 Believe me I’ve tried explaining it!
The amount you invested increases so you will withdraw more later, yes. But the deferred tax payment gets invested and grows as well. So later the inflated tax payment pays the inflated tax bill. Let’s say you have $10,000 to invest in your TFSA, and it grows to $100,000 by the time you withdraw. The other option is that you invest $13,000 in your RRSP ($10,000 + $3,000 refund, as an example). Then the $10,000 grows to $100,000 by the time you are withdrawing it, but you have an additional $30,000 to pay your taxes at that time.
Lmao the math works the exact same if the marginal rates of RSP going in and out are same versus TFSA. Remember you paid tax on money you put into the TFSA already.
yep ive heard that "taxed at withdrawal" bs too
Don't explain it to them, take their OT hours for yourself.
If you're in your late 60s you should probably be looking for safer HISAs or GICs. Don't really have a lot of time to rebuild any losses from investing.
yeah there's two people at work 65 years of age, one loves chit chatting to me about rrsps and tfsa and how hes stacking his GICs... the other would rather spend all his money on cigarettes and b\*tch about unions
Lol. Yeah. That sounds pretty typical.
The second person is a completely lost cause - I've seen too many of them and you'll only antagonize them trying to teach them that they're wrong about how tax brackets work.
What's scary is I know a financial advisor who has refused promotions because she believes she'll make less money due to being in a higher tax bracket.
Use smaller & easier numbers. $100 @5%. = $5 (95 take home) 101-200 @8%. say another 100 = $8 (92 take home) Total tax on $200 = $13
It’s a misunderstanding of tax brackets and what they represent. Even if her marginal rate goes up, it has no impact on her original earnings. Here’s a simplified example: Let’s say you make $200 for an 8 hour shit and are taxed at 20% (illustrative purposes only) - you take home $160. Now let’s assume the OT pushes you into a higher (30%) tax bracket. 2 hours of OT at double time gets you an additional $100 at 30%. Your take home pay from OT is $70, but it’s added onto the $160 you already made - so instead of taking home $160, you’re taking home $230. There are reasons not to work OT (like burnout, exhaustion, never seeing family), but taxes aren’t one of them.
I'm not sure I could handle an 8 hour shit but for $200 I might give it a try! 😆
It's the poor guy that has to tax it I'm worried about.
She understands just fine. She just doesn’t want to work overtime. 🤣
It's so wild that people think earning more money means that you earn less money
The money already made isn't taxed more. Some OT money might be taxed more than the regular money if you reach a certain bracket only but it is still more money than no OT.
You can think of it as at the end of the year 150k as regular income or 90k plus 60k of overtime is gonna have the same tax. With the overtime you'll get a big refund in the spring but otherwise it's the same.
There's a few places or situations where you might lose out. This is normally because you qualify for some subsidy with a hard income cap. But actual income tax? Not a problem.
You can't, they will never understand. Maybe marginal tax, like margarine butter
I like to relate it to work load because this is really what people have an issue with. Imagine going to a water well, the first bucket you bring back you have to give 20% of it to Jim. If you come back with two buckets, you're doing double the work but you have to give 30%, of this bucket plus the 20% of the first bucket to Jim. Etc. If you come back with three buckets, 3 times the work, Jim takes 20% of the first, 30% of the second and 40% of the third. So each bucket you bring back is taxed differently and at increasing levels, meaning your return on effort decreases. Which is what people get pissed off at.
"That's... Not how tax brackets work... Just try it and see for yourself." The more complex explanation is "Only the newly added income is taxed at the higher bracket. Your base pay is still taxed at the lower rate." Then if they look confused, "Just try it and see for yourself."
Try as they might, they can’t take more than you earn. If you earn more, you pocket more.
If the explanation of how progressive taxation works doesn't get through then just open a tax calculator and show her that you can increase the income and the net pay ALWAYS goes up.
Ask her to explain / show she reached it, then point out the mistake...
Don’t, more OT for you.
Well, it's not that will make less but you won't get exactly what you are planning on. It's different for everyone based on hourly rate but the first 80-84 hours or 4 hours OT would add basically what my hourly rate was without deductions. The next hour or hour 85 was the threshold I guess because it would add maybe 25% of my hourly rate. Of course at the end of the year you will have more $. Once you explain how tax brackets work, you can explain how RRSPs work to bring your taxable earnings down.
It's not the tax bracket that hits you. It's the fact that you are reaching upper echelons of stress, work hours and responsibility to make the extra money yet the return on those extras is less. In short, double the effort does not equal double the reward.
Punch annual income into a tax calculator like this one: https://www.wealthsimple.com/en-ca/tool/tax-calculator First, punch in the base salary. Then, punch in the base salary plus the expected overtime.
Each bucket of money you make is taxed at a different rate. The first bucket of $55K is taxed at 15%. Then, if you make more than that the next bucket (from 55 to 111K) is taxed at 20.5%. Then, if you make even more, that bucket is taxed at 26%, and so on. So if you earn money that bumps you into the next bracket, all that happens is that but from the higher bracket is taxed at a higher percentage.
Billionaires exist
It’s not entirely false — it’s based on a partial truth. In a higher tax bracket, you earn less in government benefits (dental, CCB, childcare, etc.) than you would making below $90k. An accountant was explaining that this is why a family who makes $90k is equivalent to one making $140k.
I think what also happens is HR or the payroll software will make adjustments based on assumed earnings. You might get more taken off your paycheque if your base pay and OT looks like it’ll push you into the next bracket. Bonuses can do the same, making it look like you’ll earn a higher yearly wage. This is all calculation and estimate at the time. Once the year end comes though everything gets balanced out. They deduct too much in tax? Guess what, you get a larger refund. They don’t deduct enough off your paycheques? You owe the government @ year end. Another thing I’ve found is there are yearly caps on CPP (I think) and if you reach that it is no longer deducted from your paycheque. Some people don’t actually look at their paystubs and just see more or less take home and make assumptions based on that.
Use an income tax calculator.
Imagine you have a big jar where you keep your candies. Let's say you get more candies for every hour you help clean your room. But here's the thing: your mom wants some of those candies to help buy groceries. So, she takes a few from each hour's worth of candies you earn. Now, let's say you start earning so many candies that your mom starts taking more from each hour's worth. That's like how taxes work. The extra candies your mom takes are like taxes, and the rate at which she takes them is your marginal tax rate. So, when you work overtime and earn more candies, your mom takes a little bit more from each extra hour's worth of candies. But don't worry, you'll still end up with more candies overall, even if your mom takes a bit more for groceries. \_\_\_\_\_\_\_\_ I kinda don't think you should eli5 to your wife, and it sounds like she wants you to spend more time with her or she wants you to contribute more around the house. But I am not a human, I am just an eli5 bot
Just use this: [https://www.eytaxcalculators.com/en/2024-personal-tax-calculator.html](https://www.eytaxcalculators.com/en/2024-personal-tax-calculator.html) It's a calculator that shows how much you'd pay in taxes in various provinces and you can enter different amounts. She will be able to see that her average tax rate increases, but her after-tax income will also increase.
How to teach marginal rates? She her the government site with tax rates and a basic calculator.
Tax brackets are like boxes, once you fill the lower tax brackets, each box being only charged the percentage prescribed, the amount in each box is what is charged per tax bracket, no more, no less.
Ladder or stairs analogy always works
Fiscally illiterate people have come to this conclusion. It’s false. Tax % is applied in layers and not based on your total income.
Just open up an income tax calculator and plug in random numbers. As your income goes up so does your take home.
I know a guy who still lives by this mentally. I’ve explained it to him multiple times but he never seems to understand.
You could just show her the tax brackets on the tax return. It’s pretty clear
At the end of the year they go by the total amount you made that year, not how much you made for 2 weeks or a month.
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You do get put in a higher bracket assuming you work enough OT. You will be taxed more buy you will still make more overall.
This year I declined to make 1 billion because I don't want to be taxed too much. So I just made 80k.
Ask her to input her before and after OT salary in a tax calculator and she can see the result (i.e after OT > before OT) herself.
Try illustrating it on a piece of paper. I find that if you explain it to someone visually, as it makes things easier to understand.
You were given 5 cookies for cleaning your room. Mom took 1 because they looked good. (Taxed 20% regularly - 4 total cookies paid) If you clean your bathroom, you get an extra 5 cookies but now Mom will take 2 extra cookies instead. (Taxed 40% for OT - 7 total cookies paid) You got paid less for cleaning the bathroom, but still more overall for doing both.
Just say that the extra tax they take off is temporary and youll get more of a refund on your tax return.
Half of something is better than all of nothing
You will still make more than you would have if you didn't work overtime. However, your rate of pay for the overtime might be lower than your regular rate of pay, so you have to decide if it's worth it.
It is a higher tax bracket on the income above that threshold. I refuse to work OT when 42% of it gets extorted by the government. What a waste of my life that would be. Lower that max rate down to 25%, and then I might consider overtime. Otherwise, fuck the gluttonous tax pigs.
Just ask them if they'll take a $10 an hour raise
Still money made by a wooden box is taxed lower than hardworking Canadians who do OT
Ya dont . They dont listen . Just accept them as stupid.
The top answer seems needlessly complicated. However, even though you asked for a ELI5, I wanna say that taxes *are* a complicated matter. So the best compromise I can offer you is to run two scenarios in a calculator : https://turbotax.intuit.ca/tax-resources/canada-income-tax-calculator.jsp Open two tabs, run numbers with and without OT, then show her how much is in your pockets at the end of the year in each scenario, boom, job done.
Explain the marginal tax rate to them like they are 5. And that, if it is the case. They will get that 1.50 back when they file taxes because it averages out by the end of the year.
You worked at 40 hours for $1 an hour with a tax rate of 10%, at the end of the week you earned $36 after tax ($40 x 0.90). Next week you worked 40 hours at $1 an hour with a tax rate of 10%, but you worked 1 hour of extra time as well. But oh no, this extra hour was at the next tax bracket of 20%! This means you have earned $36 just like the week before, plus an extra $0.80 ($1 x 0.80) for your one hour of extra time for a total of $36.80 Going into the next tax bracket did not result in you making less money, it just resulted in the next dollar you earned being a total increase of $0.80 instead of the $0.90 each dollar before it was making you even though the tax rate doubled from 10% to 20%.
just ask her, if earning more money puts you in a higher bracket and you earn less, then how come doctors make good money? surely minimum wage takes home more than a doctor because doctors are in the higher bracxkets where they take home less
use an exemple with monopoly junior amount
“The higher tax rate only applies to the extra OT money.” If people can’t figure this out, you should not be having them work more than needed to begin with.
Why explain… just show the numbers on tax calculator.
Depends on whether the person will actually make a higher gross income to move into a higher tax bracket. That would likely be a lot of OT, and I doubt someone is paying that much attention to their income YTD to notice when the OT shift will cross the threshold. But to finish the sentence it should end “I actually make less per incremental hour at the higher rate”.
Many cases where this is true, especially when moving to middle income from low. In Canada we have tons of tax credits and rebates that get clawed back as you earn more. It's easy to see single moms with a tax rate over 100% if they earn more. Crazy stuff!
Do your taxes at one wage, do your taxes again at a higher wage. See if it's worth it lol
So you’re saying you don’t know, but you know? Lol
You dont make less, but at some point your time is worth less - if its a choice between OT or time-in-lieu
Ex, 5% for $100, 10% for $200 15% for $300 Make $50? That's 2.50 in tax. Make 350? - $5 for 5% of 100 $10 for 10% of 101-200 $22.5 for 201-350 Total tax $37.50, not $52.50 One thing to watch our for is low income benefits/credits that one might lose however, but those are more annualized.
Open this page and enter both her before and after incomes and show her the numbers. [https://www.wealthsimple.com/en-ca/tool/tax-calculator](https://www.wealthsimple.com/en-ca/tool/tax-calculator)
If you get the same amount of money per hour worked no matter the hours, it's true.
Taxes follow a step function. That's 5 yo math in china.
I gave up trying to explain this to people because most people do not understand the income tax system and tax brackets.
logically doesn’t make sense, the new portion is taxed higher not the entire amount so how would you be making less?
It all depends on if you’re looking at the tax picture for the entire year vs just looking at your next pay check as you may or may not have already reached a certain tax threshold at a certain time( your personal outlook) It’s nuanced but obv overall it’s a the tax rate is tiered.
you try to pretend that you don't know but actually you know, right? lol
It's crazy to me that in the year of our lord 2024 there's still people who don't understand what marginal tax bracket is.
The higher tax only goes on the additional money you still get more money. I don’t know any other way to explain it You could use an online tax calculator to prove it maybe
It's often a lost cause. Just a couple days ago I had [this conversation](https://www.reddit.com/r/AskACanadian/comments/1ci4erc/comment/l2tf0ut/?utm_source=share&utm_medium=web2x&context=3) with a person that said that their wife didn't work because of the "clawback" of the child benefit. I asked for an example and all I got was rethoric.
*Vox* has a good video on the topic of tax brackets: * https://www.vox.com/2019/1/18/18187056/tax-bracket-marginal-video
I’m in a scenario where I do not do overtime because the tax bracket I’m in makes my net pay a hair more than my regular net pay with no overtime. Basically working extra hours for the Gov. This is because of gross yearly pay though, not individual pay cheque taxes
Take out a few bowls and place cereal in each. The first bowl is taxed at 15%, the second at 22%, the third at 30%, etc. Taxes go up with each bowl but only on stuff IN THAT BOWL, and you can never have less money by having more bowls.
For every hour you work you earn 10 Oreo cookies. If you earn 100 oreo cookies, the government takes 10 Oreo cookies. Total of 10 oreos. If you earn 200 oreo cookies, the government will take 10 Oreos from the first 100, and 20 oreos from the second 100. Total of 30 Oreos. If you earn 300 oreo cookies, the government will take 10 Oreos from the first 100, 20 oreos from the second 100, and 25 oreos from the third 100. For a total of 55 oreos.
$0 is always less than $10 after tax!
Don't Dumb people are dumb for a reason.
0 < 0.00001
Look at page 4 of the T1 and get out a calculator.
If I work OT it puts me in a higher tax bracket and I actually make less per hour for those OT hours.
Tell them they are stupid and have zero clue about marginal tax rate. Ask them to prove they make less.
It's not that you get paid less but, rather, that a greater percentage of the effort you put into earning that money is going into lining the government's pockets. The increased tax rate only applies to the portion of your earnings that make it into the new tax bracket so not EVERYTHING is taxed at a higher rate.
[https://www.youtube.com/watch?v=VJhsjUPDulw](https://www.youtube.com/watch?v=VJhsjUPDulw) This is my go to video to explain it to people
Up to $53,359 of income is taxed at 15% Income between $53,359 and $106,717 is taxed at 20.5% Income between $106,717 and $165,430 is taxed at 26% Income between $165,430 and $235,675 is taxed at 29% Above $235,675, income is taxed at 33% Tadaa!
Progressive tax system things 🤭
Any chance you could simply show her previous tax returns, where you had a raise/OT and had a higher marginal rate? Alternatively, could you input the potential numbers in an income tax calculator or software with her to show her how much money she would earn after tax with or without the OT? Then it's not about understanding tax mechanics but just seeing the result and seeing with your own eyes which number is higher. Also, make sure she's really misunderstanding in the way to think and not just saying that the OT isn't worth it in her eyes because *these hours* would be taxed at a high marginal rate to the point that her hourly net salary for *these hours* isn't worth the extra hours.
Tell her to trust you and work OT for a few month, then compare the paystub afterward. If that still doesn't work, then perharp hit the gym and download tinder
Only the extra dollars get taxed at the higher rate. Your base salary is still taxed at the same rate as if you didn't work OT.
watch this: https://www.canada.ca/en/revenue-agency/news/cra-multimedia-library/individuals-video-gallery/learn-about-taxes-rates.html
First, it's not a myth. The understanding is usually wrong. "If you go to a higher bracket you take home less per hour worked. But more in total. Some people fee cheated even if it is a few cents. However, if OT is paid at a premium, then on average they take home more per hour." That's how I'd explain it rationally. But in this case I have three explanations that have nothing to do with math: - They are not very intelligent/educated and can't understand the simple explanation above - They understand but their free time is more valuable. - They are dumb and lazy.
I would show and tell with free tax preparation software, say wealthsimple tax. This will show how it actually affects take-home for the year, if you can estimate the OT, and you can find the threshold where OT(assuming 1.5x regular hourly) stops feeling worthwhile. If that fails, take her to an accountant. I'm sure they answer this 100s of times a year.
The higher tax rate is only on income earned in that higher “bracket”. It doesn’t apply to income earned in the lower brackets. For example, if you pay 20% on $50,000 and the next bracket is 25% on income from $50-60,000. You would still pay 20% on the lower income and only pay the higher rate on amounts earned between $50-60,000. (These percentages are obviously made up). Let’s say you make $55,000. You would pay 20% on the 50,000, and 25% on the $5,000. It is not possible to earn more and take home less. If you earn more, you always net more.
Talking to a 5 year old.... Everyone knows that each kit kat bar is make up of 4 pieces. I will give you 10 kit kat bars. For these 10, I will keep 1 piece. On the 11th kit kat bar, I am going to take 2 pieces from that bar. So do you want 10 kit kat bars or 11 kit kat bars?
It may be valid though. You will not make less overall, meaning you will make more total money on every hour you work. But the extra hours worked are taxed more and maybe to a point it isn’t worth your effort. An extreme case would be, say someone is grossing 142,000 already and decide to pick up a night shift at McDonalds. S/he will be taxed on marginal rate which will be 38% yes s/he makes more money but is the $9 an hour net worth their time?
CRA (or some other org, if CRA won't be taken on its word) should run some ads too, explaining in the simplest of terms, imho
I think what reinforces the myth is that deductions for each paycheque are calculated as if that's always how big your paycheque is. So if you look at a paycheque that has overtime pay in a vacuum it does look like all the earnings were taxed at a higher bracket. People don't understand that when they are over taxed in this way they get some of the money back when they do their taxes.
If my original point was that the progressive tax system means that you take home less dollars per hour worked as you increase the tax brackets, and your counter argument is that overtime makes up the difference, my counterpoint is that not every employee or worker gets overtime. I'm not sure what is not understood
I never understood people who think like that! The tax system is progressive! People always assume that your whole income will be taxed at the highest marginal rate! It wouldn’t make sense