There are two (2) ways to calculate income tax in Harmony:
- Taking historical payrolls into consideration (recommended), or
- Independently from historical payrolls
The first method will consider historical payrolls (in the same pay period) into calculating taxes. This means that if you have more than one run in a pay period, the income taxes will typically be significantly higher on the second run.
The second method will consider each paycard independently, even if they are in the same pay period. This means that if you have more than one run in a pay period, the income taxes will be relatively lower.
There is an option in your preferences in Harmony Payroll which will identify which method that your income taxes will be used to calculate. By default, it is set to the recommended method.
NOTE: This option does not impact calculations for Canada Pension Plan (CPP), Quebec Pension Plan (QPP), nor Employment Insurance (EI). These taxes/contributions will always include historical payrolls in the calculations. This option will only impact calculations for Federal and Provincial/Territorial Income Taxes.
To enable or disable this feature:
- Log into Harmony Payroll.
- Navigate to Payroll > Admin Settings > Payroll Preferences.
- Enable the toggle for “Calculate income tax based on totals of the pay period” for the recommended method. If not, disable the toggle for method #2.
4. Click the save button to save your changes.
Case Study: Understanding Income Tax Variation
In the initial payroll run of a pay period, an employee receives their regular salary, and taxes are calculated solely based on this amount. However, during a second run within the same pay period, a bonus is paid.
When the "Calculate income tax based on totals of the pay period" option is enabled (i.e. the recommended method), Harmony considers the total earnings of the pay period, now including the bonus. This results in a higher taxable income and potentially increased taxes. The image below demonstrates this variance in tax calculation.
In the first image, taxes are computed based on the total earnings of the pay period, including both the regular salary and bonus. Thus, there is a higher tax deduction compared to the second image, where "Calculate income tax based on totals of the pay period" is disabled before running the second run of the pay period (bonus run).
In this case, taxes are independently calculated for each paycard without regard to previous pay runs within the same period. As a result, the income tax amount shown in the second image is lower.