How Much Tax Should a Self-Employed Person Set Aside?

Do not reserve tax from revenue alone

Income tax and CPP/QPP are generally based on net business income after eligible expenses, not gross deposits. GST/HST collected is a separate liability. A useful reserve therefore begins with projected annual profit and a separate sales-tax reconciliation.

Monthly example

A consultant invoices $10,000 plus applicable HST in a month. Business expenses before HST are $2,800. The consultant should separate the HST collected, estimate the HST recoverable on eligible costs, and then estimate personal tax and CPP on the expected annual net profit.

Putting a flat percentage of the $10,000 into one savings account may be simple, but it can overstate or understate the requirement. A better system has separate subaccounts for sales tax and personal tax.

CPP can be significant

A self-employed individual generally bears both the employee and employer portions of CPP or QPP on applicable earnings, subject to annual exemptions, rates and maximums. This makes the contribution larger than many former employees expect.

A tax estimate that includes only federal and provincial income tax can leave a material shortfall.

Use a range, then refine it

At the beginning of the year, create a conservative reserve percentage based on expected profit and province. After each quarter, annualize actual profit and update the estimate. A taxpayer with high expenses or loss carryforwards may need less; a professional with strong margins and other income may need more.

The reserve should also reflect whether tax instalments are already being paid.

Instalments are not an extra tax

Quarterly instalments are prepayments toward the eventual balance. When calculating the remaining reserve, subtract instalments actually paid. Do not treat the instalment notice as the final tax calculation; compare the permitted methods with current-year expectations.

A practical bookkeeping routine

Each month:

1. 1. reconcile all revenue, including cash and platform income;
2. 2. record eligible expenses;
3. 3. transfer net GST/HST collected to a tax account;
4. 4. update projected annual profit;
5. 5. estimate income tax and CPP/QPP;
6. 6. subtract instalments already paid; and
7. 7. retain the remaining reserve.

This routine turns tax planning into a monthly cash-management process rather than a year-end emergency.