Setting aside tax: three systems that actually work

Every contractor knows the theory. Some of each payment belongs to Inland Revenue, so you put it somewhere before you spend it. Knowing that isn't the hard part. Having a system you actually follow in a busy month is. This guide covers three systems that hold up when you're flat out, and how to size the percentage so you're not caught short or starving your own cash flow.

First: how much to set aside

The amount has three parts:

• GST: the exact 15% you collected on the invoice, if you're registered. It's a known amount on every invoice, not an estimate, and it belongs to Inland Revenue.
• Income tax: your effective rate, not your top bracket. A contractor on $120,000 of profit has an effective rate around 25%, not 33%, and the bracket math guide has the table. Setting aside your top rate feels prudent, but it quietly locks up thousands you could be using.
• ACC: roughly 2% for low-risk desk work, and more for riskier classifications. It's small enough to forget, and annoying to be caught out by when the invoice lands 18 months into your first year.

For a GST-registered contractor in the low six figures, a working rule of thumb is to set aside the GST portion, plus roughly a quarter to a third of the rest, depending on where you sit in the brackets.

Strategy one: per payment

Each time an invoice is paid, move the tax portion to a separate account the same day. This is the most accurate system, because the set-aside tracks your real income automatically. Busy months reserve more, quiet months reserve less, and there's never a catch-up. Its weakness is that it relies on discipline, since you have to do a small task every time money arrives, on good days and bad.

Strategy two: monthly sweep

Once a month, total the month's paid invoices and move one combined amount. This is easier to sustain, since it's one calendar reminder and one transfer, and it's accurate enough if you actually do it. The risk is the skipped month that becomes three, at which point the transfer is big enough to hurt and gets put off again. If you choose this one, tie it to something fixed, like the day you reconcile invoices.

Strategy three: the account you can't see

Whichever cadence you pick, where the money goes matters as much as when you move it. The set-aside account should be:

• Separate from your everyday accounts, so the balance never looks like spending money.
• Cardless and un-linked, with no EFTPOS, not in the wallet app, and ideally not on the main banking screen. Making the money a little harder to reach is the point.
• Earning something, if you can, such as a savings account or a facility where the balance offsets interest. Tax money sits for months between due dates, so it may as well earn something while it waits.

When the money leaves again

The money leaves in lumps on known dates. That's GST returns on your filing cycle, provisional tax instalments, ACC once a year, and terminal tax if there's a wash-up. The tax calendar lists every date for this year. A healthy set-aside account rises between due dates, drops on them, and never goes near zero the day before one.

How Coffer helps

Coffer does the tracking half of this for you. When you mark an invoice paid, Coffer splits it into the GST, your income tax at the effective rate it projects from your actual invoices, and the ACC accrual. Each part is ringfenced and totalled on the dashboard. You still choose where the money sits. Coffer keeps the number you're moving right and shows what's spoken for against every upcoming due date. And pots with a hard lock protect the savings you want kept aside on top.