Being your own boss.
Setting your own hours.
Not having to listen to that guy in the cubicle next to you slurp his coffee every morning, and don’t even talk to me about the commute…
There are tons of benefits to being self-employed, which might explain why more and more Canadians are viewing self-employment as a viable option. By 2020, it’s expected that 45% of Canadians will be self-employed.
Whatever you decide to call it; the gig economy, the side hustle, freelancing, consulting —it’s becoming a way of life because of the benefits, but there are also a lot of challenges to being self-employed, and a lot of them come down to money.
Here are four financial challenges that often affect self-employed Canadians and what you can do to stay at the top of your game.
Charging What You Are Worth
One of the most common ‘self-employed’ mistakes is selling yourself short. You’re so excited to get to work, that you undersell yourself to get the job. You think, everyone likes a deal, right? While that may be true, offering the cheapest rates is not a good long-term plan for success. If you give your first client a discount, and they love what you do and refer you, then you have to charge that client the same rates, and before you know if, you are permanently at a lower rate of earnings than you had planned on.
Additionally, if you lower your rate and find success, then in order to compete, your competitors have to do the same, and before you know it, your industry is now working for peanuts! Remember: For clients that have money to spend, your rate isn’t likely the selling point; they’re more interested in quality work and personal attention. Focusing on price may give them the impression that you don’t offer or care about these other factors.
To that point, it’s also important to ensure that you get paid for doing the job, so if you need an amount upfront, or amounts paid at different dates or milestones, don’t be afraid to ask. Many self-employed contractors and freelancers wait until the end of a project to invoice for their services, and this can leave you strapped for cash or maxing out credit cards just to get by. Some customers don’t pay the full amount, and some wind up in bankruptcy before the balance is paid. Fortunately, most clients who work with the self-employed understand the need to make payments throughout the course of the project. And if they don’t, perhaps they’re not the right client for you.
Developing a Budget—and a Safety Net
As a self-employed individual, you’ve likely experienced the thrill of “feast” and fear of “famine.” You can better prepare for both with a budget and a safety net. In time, these will become your best friends, keeping you grounded during the highs, and afloat during the lows.
Another smart tactic to consider when budgeting is to overestimate your expenses while underestimating your income; it’s better to be surprised when you earn more or spend less than to be disappointed when you go over budget. Proper budgeting will also give you a clear view of opportunities, like when you can afford to bring on an employee. Yes, employees cost money, but if you can afford it, they may be able to take care of smaller day-to-day tasks for you, freeing up your time so you can focus on higher-impact tasks that grow your business.
Finally, the ever-important emergency fund. This is your safety net. While there aren’t many guarantees that you won’t be laid off or let go when you work for someone else, there are even fewer guarantees when you work for yourself. Should you lose a major client or incur a major expense, you can dip into the emergency fund to fund a purchase or to just to get by without reaching for a credit card, until you acquire another cash-heavy customer.
Keeping Good Records—And Making Deductions
Is your home your office? If that’s the case, then you’re able to deduct a portion of your taxes for household costs. While many people might know they can deduct some of their utilities (you’re using a lot more electricity working from home every day than you would be going to an office), did you know that you may also be able to write off a portion of your mortgage interest, property taxes, and home insurance? If you use your home for a lot of business meetings, you may even be able to deduct some landscaping and repair costs; after all, the place has to look respectable when clients come by!
There are many other deductions you can claim that are often unknown or forgotten, which include:
- Advertising and promotional material
- Business-related travel (including fares and hotels)
- Meals and entertainment (generally 50% only)
- Memberships and/or subscriptions to business-related groups or programs
- Software licenses
- Job certification programs
- Office supplies
- Training and skill-building seminars
- Salaries and wages
- Telephone and cell phone expenses
- Vehicle costs (maintenance, insurance, car washes, and a portion of gas)
Of course, keeping track of receipts can sometimes feel like a job in an of itself. They’re easily misplaced and accidentally thrown out; plus; the old shoebox organizer… often isn’t organized. Consider a personal online finance tool, like Quickbooks Self-Employed, for categorizing spending, managing receipts, and making life easier at tax time.
Planning for Taxes—and Growth
As a self-employed Canadian, you likely enjoy the fact that you don’t have to answer to anyone. But that’s not entirely true—you still have to answer to the Canada Revenue Agency!
To avoid digging around for money when you find out you owe on your tax return, practice “DIY Withholding.” This involves creating a separate savings account to set aside money from each sales transaction in order to settle up when it’s time to pay up. To give you a good idea of what you may owe based on what you earn, the CRA provides a number of resources online.
You may also want to register for a Good and Services tax (GST) / Harmonized Sales Tax (HST) number. It’s required for self-employed people earning more than $30,000 in a calendar quarter or over 4 consecutive calendar quarters, but you can also obtain a GST/HST number even if you earn less. Registering before reaching the $30,000 threshold not only makes you look more legitimate to potential customers and clients – making them more willing to work with you – but it also allows you the opportunity to claim Input Tax Credits and practice collecting, remitting and filing GST/HST before the numbers get really high.
GST/HST requires you, the registrant, pay the government a portion of the income you collect from providing a service. So if you’re a DJ, for instance, you would charge the venue your fee, plus GST/HST, and put the GST/HST portion into your tax savings account, leaving it untouched until tax time when you would then remit it (and other funds held for the government) to the CRA.
Finally, you may also want to consider incorporating your business. While this might sound like something reserved for the big guys on the TSX, experts agree that even the smallest businesses can benefit from incorporation.
Remember: Help is Out There
Navigating through financial waters, especially in regards to taxes, can be challenging as a self-employed individual. While the tips above may be helpful, you might need more personalized advice. To help ensure your financial success and avoid common pitfalls, Credit Canada has partnered with TurboTax Canada to provide you with the resources you need.
We’re both always here to help.
About Anna Guglielmi
Anna is a certified credit counsellor and financial coach for Credit Canada Debt Solutions – Canada’s first and longest-standing non-profit credit and debt counselling agency. Anna works with clients one-on-one to help them achieve their financial goals, eliminate debt, improve their credit, and remove the stress that comes with debt by providing the best possible unbiased advice and solutions.