Setting aside tax: three systems that actually work

Every contractor knows the theory: some of each payment belongs to Inland Revenue, so put it somewhere before you spend it. The difference between contractors who cruise through tax season and contractors who dread it isn't knowledge, it's a working system. This guide covers the three systems that actually survive contact with a busy year, and how to size the percentage so you're neither caught short nor 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. This isn't an estimate; it's a known amount on every invoice, and it was never yours.
• Income tax: your effective rate, not your top bracket. A contractor on $120,000 of profit has an effective rate around 25%, not 33%; the bracket math guide has the table. Setting aside your top rate feels prudent but quietly locks up thousands you could be using.
• ACC: roughly 2% for low-risk desk work, more for riskier classifications. Small enough to forget, annoying enough when the invoice lands 18 months into your first year.

For a GST-registered contractor in the low six figures, the working rule of thumb is: 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: 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 discipline; it relies on doing 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. Easier to sustain (one calendar reminder, one transfer), and accurate enough if you actually do it. The failure mode is the skipped month that becomes three, at which point the transfer is big enough to hurt and gets deferred again. If you choose this one, tie it to something immovable, 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. The set-aside account should be:

• Separate from your everyday accounts, so the balance never looks like spending money.
• Cardless and un-linked: no EFTPOS, not in the wallet app, ideally not on the main banking screen. Friction is the feature.
• Earning something, if you can: a savings account or a facility where the balance offsets interest. Tax money sits for months between due dates; it may as well work.

What the set-aside is building toward

The money leaves in lumps on known dates: 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 is the tracking half of this system done for you. Every invoice you mark paid is split automatically: the GST, your income tax at the effective rate Coffer projects from your actual invoices, and the ACC accrual, each ringfenced and totalled on the dashboard. You still choose where the physical money sits; Coffer makes sure the number you're moving is right, shows what's spoken for against every upcoming due date, and pots with a hard lock cover the savings you want protected on top.