Ask LH: Should I Spread Out My Overtime To Minimise Tax?

Hey Lifehacker, I’m currently in a job that requires a large amount of overtime and some people are telling me: “Spread out your overtime over pay weeks or else you’ll be taxed more if you do it in one hit”. I’m no accountant but I figure that it will all even itself at the end of the financial year — no matter which weeks you happened to work the overtime in. Can you enlighten me? Thanks, Tax Timing

Dear TT,

You’re correct — the amount of tax that you owe is based on your annual salary, so whether you work 20 hours of overtime in one week or over the course of the year, the ultimate amount of tax you will owe on that income will be the same.

Under some circumstances, if you work a large amount of overtime in a single pay period, your employer might end up withholding slightly more tax during that period than is actually required in terms of your eventual salary. However, if that’s the case, you’ll receive that money back as a refund when you submit your annual tax return.

This will only happen if the amount of overtime you earn would mean your total annual salary would end up in a higher tax bracket if you earned that amount every single pay period. These are the basic tax bracket threshold amounts for the 2014-2015 year:

Taxable income Tax on this income
$0-$18,200 Nil
$18,201-$37,000 19c for each $1 over $18,200
$37,001-$80,000 $3,572 plus 32.5c for each $1 over $37,000
$80,001-$180,000 $17,547 plus 37c for each $1 over $80,000
$180,001 and over $54,547 plus 45c for each $1 over $180,000

This might be easier to understand with an example. Let’s assume that your normal annual salary is $36,000. According to the rough and ready tax withheld calculator, the tax that would be taken out of your approximate monthly income of $3000 would be $338.

Now imagine in just one month of the year you do a lot of overtime and earn an extra $900. If you earned $3900 every month, your annual income would be $46,800 — which would put you into the next tax bracket (which starts at $37,000). The tax withheld calculator suggests you’ll be taxed $641 — an extra $300 in tax even though you’ve only earned $900 more.

However, when it comes time to do your tax, your annual income is still only $36,900 — below the $37,000 threshold. So you’ll be due a refund for the excess paid in that period.

Note that if you normally earn $40,000 a year and overtime pushes you to $60,000 over the year, your monthly tax should remain accurate. It’s only if your overtime moves you from one bracket to another that the calculations will differ.

The exact amounts here would vary depending on your income and whether your have a HELP debt and health cover. However, the principle doesn’t change. Tax is based on your annual income, not what you earn in shorter periods of time. The advantage of taking a conservative approach and taxing based on assumed annual income is that you won’t end up owing more at the end of the year. It’s always nicer to get a refund than to receive a bill!

As always, for specific taxation advice you should consult a financial professional. However, holding off on overtime to reduce your tax doesn’t make sense — you’re still being paid more for the extra hours you work.


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Overtime picture from Shutterstock

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