Your client pays $1,500 on the first of the month, and by the fifteenth it has become rent, data, generator fuel and a family transfer. Then a tax notice, a bank query or a visa application asks for proof of income and a tax record, and there is nothing left to pay with. This is the most common money problem for dollar-paid contractors, and a simple monthly routine prevents it.
This guide gives you that routine. It does not tell you what rate you owe, because that depends on your country, your status and rules that change. It shows you how to build a tax pot now, so that whatever your accountant eventually says, the money is there.
Why contractors need their own tax pot
An employee usually has tax taken from pay before it arrives. A contractor is normally paid the full invoice amount and is responsible for working out what is owed. Nobody deducts anything for you, so nobody warns you either.
If you are paid by a foreign client as a contractor, you are generally treated as self-employed or running a small business. That means you may need to file returns, keep records and pay tax yourself, depending on where you live. If you are on an employer-of-record arrangement, tax may be handled differently. Our post on Employer of Record vs Direct Contractor explains what changes.
What you must confirm before you pick a percentage
Do not copy a percentage from a forum. Rules differ by country and change, and Nigeria in particular has had recent tax reforms, so older advice may be out of date. Before you fix a number, get answers to these questions from the official tax authority or a licensed accountant:
- Do I need to register as a taxpayer, and do I need a tax identification number?
- Is income from a foreign client taxable where I live, and how is it reported?
- Can I deduct business costs such as internet, a laptop, co-working fees and software?
- Are there rules for people who use a business name or a company?
- When are returns due, and are there advance payments during the year?
The relevant bodies are your federal tax authority and state internal revenue service in Nigeria (check the current official name of the federal body), the Ghana Revenue Authority, the Kenya Revenue Authority and SARS in South Africa. Use their official sites, not a social media agent who promises to "sort it out" cheaply.
Step 1: Create three buckets
The routine works because you split money the moment it lands. Open or label three places:
- Landing account. Where the client's payment or your converted payout arrives.
- Tax pot. A separate account or savings space you do not touch for spending.
- Spending account. Where your monthly living budget goes.
A separate account matters more than a clever app. If the tax money sits in the same balance you use for daily spending, you will spend it. Pick a reliable bank or fintech product with a clear withdrawal policy; our guide on where to keep money based on when you need it helps with that choice.
Step 2: Pick a placeholder rate
Until a professional gives you a real figure, use a cautious placeholder. Many contractors pick a round number on the high side, for example 20% of each payment, because over-saving is a pleasant surprise and under-saving is a debt. This is a budgeting buffer, not a statement of what any law requires.
Once your accountant or the tax office confirms your actual position, change the percentage. Whatever is left over in the pot afterwards becomes savings.
Step 3: Run the same routine on payment day
Do this within 24 hours of every payment, so it never depends on your mood.
- Record the gross amount. Write the invoice amount, the date, the client and the invoice number in a spreadsheet.
- Record fees. Note platform, transfer and conversion charges, and what actually reached your account.
- Convert if needed. Note the rate you got in naira, cedis, shillings or rand.
- Move the tax share. Calculate your placeholder percentage on the gross amount and transfer it to the tax pot straight away.
- Pay yourself. Move your monthly budget to the spending account. Leave the rest in the landing account as a buffer.
A worked example (hypothetical)
Say you are a customer support contractor paid $1,200 a month. For illustration only, assume your payout converts at ₦1,500 to the dollar, and that fees take $30 per payment. These figures are invented to show the arithmetic, not current rates.
| Item | Dollars | Naira (illustrative) |
|---|---|---|
| Invoice amount (gross) | $1,200 | ₦1,800,000 |
| Fees and charges | $30 | ₦45,000 |
| Received | $1,170 | ₦1,755,000 |
| Tax pot at 20% of gross | $240 | ₦360,000 |
| Left to spend or save | $930 | ₦1,395,000 |
Notice the tax share is calculated on the gross invoice, not on what arrived. That is deliberate: tax is more often based on income earned than on income after bank charges, though your accountant may treat fees as a deductible cost. Either way, the extra $10 or so you set aside is cheap insurance.
Over twelve months, that routine puts $2,880 into the pot. Now you can pay a bill, an accountant, or a filing fee without borrowing.
Step 4: Keep the records a tax office or visa officer will ask for
Saving the money is half the job. The other half is proof of where it came from. For each client, keep:
- The signed contract or statement of work (see our post on statements of work).
- Every invoice, with number, date and amount. Our guide to what a clear invoice must include covers the details.
- Bank or wallet statements showing the matching deposit.
- Receipts for business costs you may claim, such as data plans, equipment and software.
Store copies in cloud storage and on a flash drive. Power cuts and stolen phones should not erase your income history.
Handling irregular income
Not every contractor earns the same each month. Three adjustments help:
- Percentage, not amount. Always save a share of each payment, so the pot grows and shrinks with your income.
- Pay yourself a fixed salary. Move the same amount to spending each month and keep the surplus from good months in the landing account for lean ones.
- Late payments. Do the routine when money arrives, not when you invoice. If a client is overdue, follow the steps in our late payment escalation plan.
Common mistakes
- Treating the landing balance as income you can spend. Part of it belongs to the tax office, whatever the rate turns out to be.
- Keeping tax money in dollars while expecting a naira bill. If the liability will be in local currency, a currency move can leave you short. Ask your accountant which currency makes sense.
- Using a personal account for everything. Mixed spending makes your records messy and your income hard to explain.
- Paying someone to "reduce" your tax with fake documents. Forged statements or invented expenses are fraud, and the risk lands on you. Legitimate savings come from claiming real costs you can prove.
- Waiting for a notice. Registering and filing on time is usually cheaper than fixing a late one.
How it differs by country and situation
| Situation | What to check |
|---|---|
| Nigeria, freelancer with no business name | Personal income reporting and your state tax authority; confirm any recent changes |
| Nigeria, registered business name or company | Business filing duties in addition to personal ones |
| Ghana | Registration and return rules with the Ghana Revenue Authority |
| Kenya | Registration, returns and advance payments with KRA |
| South Africa | Provisional tax rules for self-employed people with SARS |
| Paid through an employer of record | Ask the EOR what is deducted and what you must still declare |
| Living abroad | Residency rules in both countries; get advice from a licensed adviser |
Frequently asked questions
Does the foreign client deduct tax for me?
Usually not if you are a contractor. Some clients ask for tax forms for their own country, which is a separate matter. Read your agreement, and see our clause-by-clause guide to know who handles what.
Should I hire an accountant?
Yes, at least once. A single consultation to confirm your registration, rate and filing dates is usually worth the fee. Choose someone licensed with a professional body and avoid anyone who guarantees you will pay nothing.
Is 20% the right figure?
It is only a cautious placeholder. Replace it with the figure your accountant or tax office gives you.
Can the tax pot earn interest?
Possibly, if you choose a savings product that allows it. Only use regulated banks and apps, and never put tax money into schemes promising high returns.
Your next step
Today, open a separate account for taxes and make a spreadsheet with five columns: date, client, gross amount, fees and tax set aside. Then book one conversation with a licensed accountant or the tax office to replace your placeholder with a real number.
Always apply through the employer's official website or verified channels. Genuine employers never ask applicants to pay for a job, training, or an interview.