What to set aside, and why 25%

When you work for yourself, nobody takes tax off your pay. The bill arrives in one go in the spring. The Set aside for tax card on Home and Tax time tells you roughly how much to keep in a separate savings account, so the bill isn't a shock.

How the number is worked out

It covers this calendar year so far, from January 1 to today, and adds up two parts.

1. Sales tax you owe. Only if you are registered for GST/HST, or charged sales tax.

• The sales tax on your invoices,
• less the tax on credit notes,
• less the GST/HST you can claim back on expenses (your input tax credits).

If that comes out below zero, it counts as zero. A refund isn't money you need to keep aside.

2. Income tax and CPP: 25% of your profit.

• Profit is your sales before tax, less your expenses, the same number as the profit and loss in Reports.
• 25% of it is set aside for income tax and Canada Pension Plan.

Why 25%?

When you are self-employed you pay both halves of CPP, the employee's and the employer's. That alone is about 12% of your earnings up to a yearly limit. Add federal and Ontario income tax, and 25% is a sensible middle-of-the-road rule of thumb for many owner-run businesses.

It is not a tax calculation. Your real bill depends on:

• your total income, including any job or other income,
• your province,
• deductions and credits, such as RRSP contributions,
• whether you already paid instalments.

When to set aside more

• Your profit is high, roughly over $100,000. Tax rates go up as income does.
• You also have a job or other income that uses up the lower tax brackets.
• You missed setting money aside last year and still owe.

Setting aside too much is a nice problem: the leftover is yours in the spring.

Corporations

If your business is incorporated, the corporation pays its own tax, and you pay personal tax on salary or dividends. The 25% rule is rougher for corporations. See Corporations: salary or dividends.

This is general information to help you keep your own records. It is not tax or legal advice.

Based on: CRA guide T4002, Self-employed Business, Professional, Commission, Farming, and Fishing Income

Last checked: 2026-10-12