When you work for yourself, taxes are no longer taken off your paycheque before the money reaches you. You receive the business income first, which means you also have to make sure enough is set aside for the tax bill later. Depending on your situation, that can include income tax, CPP contributions, and tax instalments.
A common starting point is to put aside around 25-30% of your net business income. The amount you actually need can change based on where you live, how much you earn, your deductions and credits, other income, and whether you operate as a sole proprietor or via a corporation.
Start With a Percentage and Not a Tax Bill
If you’re a sole proprietor or part of a partnership, your business income generally ends up on your personal tax return. A good place to start is by putting some of your net business income aside as you earn it. You don’t have to wait until tax time to figure out how much you have left to pay.
Setting aside 25-30% can be a useful starting point for many business owners. But your actual tax bill can be higher or lower depending on your income, total deductions, credits, CPP contributions, and other factors that affect your tax return.
The Number You Start With Isn’t Your Final Tax Bill
On paper, it seems simple enough to calculate your total business earnings, deduct all expenses, and assume the result is the amount you will have to pay taxes on. In practice, the calculation may involve more than that.
While net business income serves as the primary basis for calculation, various incomes, deductions, credits, and tax adjustments may change your total taxable income. That’s why taking your business income and applying the same percentage every year will not give you a reliable estimate of what you’ll owe.
Accurate records matter because eligible business expenses can reduce your business income, while personal expenses remain personal even when they’re paid from a business account. So, when you decide how much to set aside, use your net business income as a starting point, then consider the other factors that affect your final bill.
Your Tax Reserve Needs to Cover CPP
Income tax is only a part of the amount that a self-employed person has to plan for. CPP contributions can add a massive amount to the final bill, so they need to be included when deciding how much to put aside.
In 2026, for self-employed individuals, the amount paid is equivalent to that paid by the employer and the employee. The combined rate for base and first additional CPP is 11.9% on contributory earnings above the $ 3,500basic exemption and up to $74,600. The maximum contribution for this portion is $8,460.90
For those earning higher than this amount, there is also the provision for additional CPP2. In 2026, an additional 8% rate applies to amounts earned from $74,600 to $85,000, with a maximum contribution of $832.
This is why a 25–30% income-tax reserve does not cover the total savings required. If you are self-employed, your tax planning needs to leave room for CPP as well, particularly when your income increases.
A Higher Income Can Change What You Owe
The percentage you set aside might need to change as your income level rises. This is because the personal income tax is progressive. You are not taxed at your highest rate on every dollar you earn. Different portions of your taxable income are taxed at different rates.
In 2026, the federal tax rate starts at 14% on your first $58,523 and increases as your taxable income grows. The rate for Ontario will be 5.05% on your first $53,891. Both federal and provincial tax rates apply to the income that falls within each bracket, rather than your entire income at once.
If your income increases, the amount you need to set aside may increase as well. Deductions, credits, and other income can also change the final tax amount. For that reason, the percentage you use should be reviewed as your income changes. A percentage that worked last year may not be suitable this year.
The Math Changes When You’re Incorporated
Now that you are incorporated, your tax considerations will extend beyond your personal taxes. Your corporation has its own tax implications, and you still have your own personal tax position.
If your Ontario CCPC qualifies for the small business deduction, then its eligible active business income can qualify for the small business deduction. The federal small business tax rate is 9%, but the provincial lower corporate tax rate in Ontario is 3.2%. This means the combined federal-provincial tax rate is 12.2% for qualified income below the business limit. The federal business limit is generally $500,000, although it may vary depending on circumstances such as associated corporations and capital and investment income.
The tax rate of the corporation is not the tax rate at which you will pay taxes on money coming out of the corporation. Depending on your personal situation, you may pay different rates on the salaries and dividends you receive.
This is why the same 25 percent or 30 percent rule used to calculate the tax payable by a sole proprietor doesn’t apply to the company’s earnings. You have to factor in the tax that the company pays, as well as your own tax on the amount earned.
Tax Instalments Can Change Your Payment Schedule
Self-employed tax payments do not always wait until you file your return. Once you meet the CRA’s instalment requirements, you may need to make the tax payments during the year instead of paying the full balance after filing.
If your net tax liability exceeds $3,000 for 2026 and exceeds $3,000 in either 2025 or 2024, you will typically need to pay installments. The $1,800 threshold is lower in Quebec. Typical 2026 installment dates are March 15, June 15, September 15, and December 15.
When deciding how much to set aside, timing matters. At first, a new business owner might set aside money for one yearly tax bill. A portion of that reserve must be accessible at various times during the year once installments are applied. Interest and, in certain situations, penalties may also be imposed for missing or underpaying an installment.
The payment deadline and the filing deadline are different. Self-employed people generally have until June 15 to file their tax return, but any balance owing is generally due by April 30. By keeping those dates separate, you can avoid treating the filing deadline as the due date for all tax payments.
Keep Your Tax Money Separate
To avoid mixing tax money with money you need for personal or business expenses, set up a separate savings account for taxes. Each time you receive business income, you can move a portion into that account instead of waiting until tax season to see what is left.
A simple approach is to:
- Set aside a portion of your net business income as a reserve
- When your income rises or falls, double-check that figure.
- Keep separate records of CPP contributions, including CPP2 if applicable.
- When your credits, deductions, or other income sources change, update your estimate.
- When determining how much cash to keep on hand, keep future tax payments in mind.
Your percentage could vary during the year. If your income is higher than planned, raise your reserve percentage; if it declines, or other deductions come into play, lower it.
It is not about picking one percentage and sticking to it forever. It is better to revise your calculation from time to time.
The percentage could change during the year. If your income is higher than planned, raise your reserve percentage, and when income declines, or other deductions come into play, you can lower the reserved amount.
The point is not to take one percentage and stick to it forever. A better approach is to review your numbers regularly and adjust the amount you set as your income and tax position change.
Your Tax Reserve Should Reflect Your Situation
A 25% or 30% reserve can be a useful place to start, but it should not be the number you rely on all year without revisiting it. Changes in business income, CPP contributions, deductions, credits, how you pay yourself, and upcoming installments can all affect what you will actually owe. Checking those numbers as your business changes can keep your tax reserve closer to the amount you need when payment time arrives.
SJT CPA provides tax services for self-employed individuals that include income and expenses reporting, tax filing and planning, and estimating quarterly requirements. Its accounting services also cover bookkeeping and financial reporting, giving business owners support with the records and tax work behind their year-round planning.
