Taxpayer’s earning employment income generally have income tax withheld from each paycheque by their employer. In most cases, the total withheld over the course of a calendar year is fairly close to the taxpayer’s income tax payable for that year, such that the taxpayer has a small refund or balance owing.
However, where the income tax payable exceeds the total withheld by $3,000 or more, then the taxpayer will be required to pay income tax installments for the next calendar year. This could occur where the taxpayer earns income that is not subject to income tax withholdings, such as self-employment income, investment income, etc.
The tax installments payable for a particular year can be calculated under 1 of 3 methods. Under the first 2 methods, the total instalments payable for the year will be equal to the balance owing for the prior year (i.e. total tax payable, minus amounts withheld at source). The only difference between these 2 methods is the amount of each quarterly payment.
Personal tax installments for a particular calendar year are due on the 15th of March, June, September, and December of that year.
Taxpayers who are required to pay installments should monitor their income, expected tax liability, and installment payments throughout the year. If the taxpayer’s income for a particular year is lower than the prior year, then the total installments payable for that year may exceed the actual tax payable.
If this is expected to occur, then the taxpayer should consider using the expected tax method. Under this method, installment payments are calculated based on the estimated balance owing for the particular year. So the taxpayer could:
- Calculate each quarterly installment using the expected tax method, or
- Pay quarterly tax installments calculated under either of the first 2 methods, but reduce or forgoe the December (or perhaps even September) installments if paying them is expected to result in an overpayment.
Note however, that taxpayers using the estimated tax method will be subject to interest charges, and possibly a penalty, if they underestimate the required installments for the year. Similarly, taxpayers who fail to make required installments will be subject to interest and/or penalty charges. Any such interest or penalty charges are non-deductible.
Contact your DMCL advisor for further information.