Is Your Employer Withholding Enough?

As a taxpayer, it is your responsibility to make sure your employer is withholding enough taxes from your paycheque. If you fail to check this out, you could be left with a big tax bill when you file your return. If the difference between what your employer withheld and your tax liability is too large, you could even be facing taxes and interest on the amount you should have paid.

Fortunately, it is relatively easy to avoid these problems. Simply starting a dummy return and running the numbers is the best way to make sure your employer is withholding enough from each of your paycheques. If you find that the company should be withholding more, you can simply contact your human resources representative (or for a smaller firm the payroll person) and request either a new withholding form (TD1). Reducing the number of exemptions you claim on that form will increase the amount of taxes withheld from each paycheque and reduce or eliminate any further tax liability.

Setting Your Withholdings

When you started your job, one of the forms you filled out was a TD1 (you should also redo this form every calendar year). This form is where you list the number of exemptions you wish to claim. The number of exemptions determines how much your employer withholds in taxes each pay period. The more exemptions you claim, the less taxes are withheld from your paycheque.

You are entitled to claim yourself as an exemption, and if you are married you can claim your spouse as well. If you have children, you can claim an exemption for each one. The tricky part is determining whether or not you should claim all the exemptions to which you are entitled.

If your spouse works as well, it is probably best to not claim that spouse as an exemption. If your spouse claims an exemption at his or her job and you claim an exemption as well, the amount of your withholding may not be enough to cover your tax liability. The same is true if you hold a second job. Claiming yourself as an exemption at both jobs can reduce your withholding too much and leave you owing additional taxes.

Additional Income

You may also wan to decrease the number of exemptions you claim if you have additional sources of income besides your job. If you have a large amount of income from interest, dividends or capital gains, the amount withheld from your paycheque may not cover your total liability.

Reducing the number of exemptions you claim on your TD1 can even things out and reduce any additional taxes at the end of the year. If your other sources of income are substantial, it is a good idea to run the numbers on a dummy tax return and use those figures as your guide.

Ideally, you want to strike a balance between getting a big tax refund and owing additional money to the Canada Revenue Agency. If you get a big refund, that simply means you have been loaning money to the government – interest free – all year. The key is to reduce the amount of your refund and keep more money in your pocket, without triggering an additional tax to the Canada Revenue Agency. Don’t use the Canada Revenue Agency like a savings plan, you’re much better off to get this money and pay down debt, invest it in a Tax Free Savings Account (TFSA), or increase your RRSP contribution.