There are two (2) ways to calculate taxes in Clarity.
The normal formula contained in this option determines the federal and provincial/territorial tax deductions on salary, wages, taxable benefits, pension income, commissions, and other periodic payments. The normal formula can also be used to calculate the tax on a bonus or other non-periodic payment.
In general, the Option 1 steps are as follows:
Option 2 formulas are intended for employees whose remuneration fluctuates considerably from one pay period to the next. In the Option 2 formulas, the amount of tax to be deducted is based on the projected annual taxable income (including bonuses) compared to the amount of tax previously deducted in the year. Option 2 works well for employees who are employed for a full calendar year. If the employee’s income is relatively stable for each pay period, there will not be a significant difference in the tax deductions with Option 2 compared to Option 1.
The following sections will explain in detail how Option 2 works. The acronym YTD used in this option means year-to-date, and will include payments or deductions for the current year, but will exclude the payment payable now and the deductions for the current pay period. Note: The tax values used in the example below are fictitious.
In Option 2, the actual year-to-date income plus the current income is projected over the remaining pay periods in the year. For example, an employee received $20,000 total in 20 previous pay periods and $500 in the current pay period, and there are 5 pay periods remaining. The projected income for the year using Option 2 will be $25,380.95 [($20,000 + $500) × 26 / 21]. When you calculate tax in Option 2, you calculate the tax on the projected income for the year, then find the tax amount that is proportional to the number of pay periods that have actually occurred (including the current pay period). Compare the result to the tax actually deducted in the year-to-date. The difference is the tax payable on the current income.
Continuing the above example, if the total federal and provincial or territorial tax on $25,380.95 is $3,560.17, the proportional year-to-date tax is $2,875.52 ($3,560.17 / 26 × 21.) If the total tax deducted year-to-date is $2,736.40, the tax on the current income of $500 is $139.12 ($2,875.52 – $2,736.40.)