Taxes are complicated. Well, at least they seem complicated, but as a small business owner you’ve got to understand the basics!
One of the most misunderstood parts of the tax system is how the government actually figures out how much you owe at the end of the day.
Here in Canada we use a Marginal Tax System, which tells you how much tax you’ll pay on your next dollar of income.
What are Marginal Tax Rates and how do they figure out how much tax you’re supposed to pay?
Marginal tax rates are a system where the government divides income into brackets, and charges us a different percentage of tax dependent on where we fall.
There’s a strange rumour out there that poor people tell each other about how they “don’t want to make more income, because it’ll bump them into a higher tax bracket.”
Well… that’s not really how it works.
Yes… if you make more money that money could be taxed at a higher rate, but it doesn’t mean that any of the money that you made prior to that will be taxed at a higher rate.
Don’t quite get it?
The Brackets for Ontario (2014)
Total Income Tax Rate (both federal and provincial)
These brackets just affect the dollars within them. If you make 50,000 dollars, that doesn’t mean your entire income is taxed at 30.02% just the dollars above 43,953.
For example. If I revolutionize the world with my singing and make 100K next year (which I fully expect), I will be taxed like this.
I know, the first thing you think when you look at a chart like this is, damn, that’s a lot of tax. Makes you want to take full advantage of that free healthcare doesn’t it?
You also may be thinking… I don’t think that I pay that much money to the government…
Don’t worry, there are tons of things that get applied to that number (especially as an artist) that make it come down to a more manageable figure. We’ll learn about that as we go!
But understanding the basic idea that it’s dollars that travel up through the margins, not people is essential. It comes into play when you think about RRSPs, TAX DEDUCTIONS, and just generally so you know how much money to set aside so you don’t end up in trouble come April. Remember, no one is deducting tax off of your cheques… it’s all up to you.