1.  Smoothing Formula:

The smoothing formula calculates the tax for an employee in two (2) stages:

 1^st Stage:  Regular Payments:  Broadly, the tax on the regular payments is calculated by first       finding an estimate for total taxable pay for the whole year, taking into account what has been paid before.  It then

• calculates the tax payable on that amount;
• subtracts the tax already paid;
• pro-rates the remaining tax for the current cycle, based on the regular payments this cycle versus the regular payments estimated for the rest of the year.

  2^nd Stage:  Irregular Payments

• The tax on the irregular payments is found by simply multiplying the payments by the employee’s highest marginal rate.

2.  Smoothing Formula 2:

This formula is similar to the Smoothing Formula with the following exceptions:

• it uses overtime and irregular income and allowances (irregular taxable pay) to determine the marginal rate.  
• Also, if the irregular pay carries the employee over into a positive marginal rate then the irregular amount in excess of the tax allowances is taxed at this marginal rate.

So, using the Smoothing Formula 2, the employee’s regular taxable earnings AND his non-regular taxable earnings are used to project what he would earn for the year.