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.

Cheers Lifehacker

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Overtime picture from Shutterstock


Comments

    If you do a craptonne of overtime in a week, sure you'll get taxed more in that week, but if overall you don't earn that much above your pay grade you'll just end up getting a great tax return.

    Just think of a tax return as forced savings :)

      I use to think of a tax return as forced savings until someone pointed out that you're actually just giving the government an interest free loan.

        Correct - but don't loose too much sleep over it. Later in life when you start getting income from investments you will have to pay tax at tax time, rather than get it back (common for a wage minus deductions person).

        Just do your tax as soon as you can after the end of the financial year and submit it ASAP if you're owed a refund. If you owe money, ask your accountant to wait until the very last day it's due before submitting it.

        Then you'll be getting an interest free loan from the government.

        Yea but by earning less to pay less tax, you're just making less money.

    Good article.

    Taking it a bit further, businesses generally withhold tax from your salary against ATO pay tables. The tables say that for an employee earning X amount per pay period, withhold Y. When an employee works additional (out of the ordinary) hours during a pay cycle, the employer can either apply the appropriate tax amount for the week per the pay tables, or, work out what the additional pay will do to the employees end of year tax and just withhold that amount.

    Most businesses do the former, as it is much easier, though the latter is more appropriate.

    i've known plenty of people that didn't want a pay rise because it would take them to the next tax bracket... some of these people were half intelligent too.

      some of these people were half intelligent too.

      Maybe, but only half. Income tax increases only on the income above the threshold. There's no such thing as "being in the next tax bracket".

      If you earn $37,000 you pay 19% tax on $37,000. If you earn $37,001 and end up "in the next tax bracket" you pay 19% tax on $37,000 plus 32.5% tax on $1. So you are 67.5c better off earning $37,001 than you are earning $37,000.

      There are some exceptions though... for example the Medicare Levy Surcharge. If you don't have private health and you earn $88,000 you pay 0% MLS. However, If you earn $88,001 then you pay 1% MLS on all income - ie: An additional $8,800 tax.

      So in actual fact, if you earn between $88,001 and $96,800 per annum and don't have private health cover, you would take home more if you only earned $88,000.

      The real catch is - if you say to your employer just once "oh, no thanks, I don't want a pay rise", You can expect never to get offered another one again.

      You'd be much better off managing your affairs and making a tax deductible donation of the difference to your favorite charity until you get out of that temporary deficit.

    Isn't the top tax rate 47% now? Plus 2% medicare levy...

      Don't forget the 10% consumption tax when you spend that hard earnt cash.

      We're all public servants these days.

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