Update: Interestingly enough, Tax Guy at The Canadian Tax Resource and I were on a similar wavelength last week when I considered writing about this topic. He wrote a blog about the High Tax Rate on Overtime. Check it out for another person’s insight!
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If you work at a job where you have paid overtime, you may have options to consider: do you want to take the money, or take leave in lieu of pay.
What you probably know already: standard practice for overtime is to pay “time-and-a-half” for overtime, or 1.5 times your hourly salary rate. In other words, say your hourly rate is $20 per hour, your overtime pay rate would be 1.5 x $20 = $30. (In some circumstances employers pay “double-time” or 2 times your regular rate.)
When you get paid out cash for overtime, since it’s over and above your regular salary, your employer is going to deduct income tax at your marginal tax rate. (Not to mention other deductions like EI, CPP, etc.)
Let’s look at an example:
Say you make $60,000 per year. That equates to roughly $30 per hour (assuming a 40 hour work week, 50 weeks a year – if you’re curious, to approximate your hourly rate: divide your yearly salary by 2000).
Now, say in a month you work 12 hours overtime. So your gross pay (before deductions) for the overtime is:
12 hours x $30 / hour x 1.5 = $540
To calculate your marginal tax rate, we hop over to Ernst & Young’s Personal Tax Calculator and input our salary. The site spits out the rates for all the provinces. Say we live in Nova Scotia, and find our marginal tax rate is 38.67%.
So after income tax, we’re left with:
$540 – 38.67% = $540 – ($540 * 0.3867) = $540 – $208.82 = $331.18 before other deductions
So unless, you’re doing things to reduce you payable income tax, like contributing to your RRSP, after all the other deductions mentioned above, your overtime pay is starting to look a lot like the rate you’d make for regular hours. And on top of that, the overtime is likely taking away from time that could be spent with your family or other loved ones.
So another option, provides basically the exact opposite outcome!
Following the previous example,
Working 12 hours of overtime, and taking it in leave gives you:
12 hours x 1.5 = 18 hours = 2.25 days of leave (assuming an 8 hour work day)
This could allow you to take extra days off here and there, like spending a PD Day home with your kids and going to a museum or movie instead of sending them to the babysitter, or taking a long weekend for a romantic getaway with your significant other.
Different work places will undoubtedly have different policies related to when you can take leave, or if you can carry it from year to year. At my job, you can carry over up to seven weeks of vacation leave, but carrying compensatory leave (what they’ve named leave earned through overtime) depends on your collective agreement. Personally I can carry mine over, but it must be used by a certain date into the new fiscal year before it’s paid out. I’ve taken overtime in lieu of pay with the express purpose of using it to take holidays and carried over my regular vacation to the next year. I’ve also carried compensatory time forward with the intention of having it paid out later because I knew I was getting a raise in between and would be paid out more than taking it in pay at that time.
Familiarizing yourself with the overtime and leave policies at your workplace will help you make decisions that fit your priorities best at the time: if you’re young, single with debt or saving for future then the money may be worth more to you, but if you have a family, your time may be more precious. To make the best decision for yourself, you have to be informed.
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