Friday, April 19, 2013

Postdoc Income Taxes: How Much Should I Set Aside?

As a short follow up to my post taking you through a hypothetical Canadian postdoc's income tax return, a few colleagues have asked me how much should be set aside from each paycheque to have enough to pay the inevitable tax bill come April.

The strategy is extremely simple: If you're in a situation where your payor does not deduct income taxes from your pay, you need to do it yourself.  Transfer part of each pay into a separate account, like a high interest savings account, or send it to the government yourself (though most people will tell you to wait until April).

What I've done here is assumed that you're a postdoctoral fellow that receives T4A (Box 105) Fellowship income, has no other income, is single, has no dependents, and has not paid any income tax through the year.  These are the numbers my 2012 tax software (TurboTax) returns as the Balance Owing.  They should cover many people, but of course your own situation will be slightly different so I'd say this is best used as a  rough estimation of how much to save to reduce the pain at the end of the year.

I've also ran the numbers through TurboTax for three provinces: Ontario, British Columbia, and Quebec.

Postdoc Salary Ontario Payable BC Payable Quebec Payable
$30,000 $4,117 $3,668 $3,110
$40,000 $6,292 $5,792 $4,363
$50,000 $9,332 $8,537 $6,012
$60,000 $12,447 $11,507 $7,849
$70,000 $15,577 $14,477 $9,686

Here's a quick example:

If you're in Ontario and are paid $40,000, you will pay $6,292 for the year.  If you are paid bi-weekly (26 pay periods per year) you need to set aside $6,292 / 26, or $242 per paycheque, to cover your income taxes.  If you're paid monthly, you'll need to part with $6,292 / 12, or $524 per paycheque.

I set up automatic transfers to move my estimated tax bill from each paycheque to an ING Direct account, so that the money is available when Revenue Canada wants it.  If you open an ING account using my  referral key (13876593S1), you can get a $25 bonus if you deposit at least $100.

Updated October 2, 2013: Included reference to ING Direct